Division of Revenue Bill [B5–2014]: briefing by Financial and Fiscal Commission and SALGA

Standing Committee on Appropriations

03 March 2014
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) and the South African Local Government Association (SALGA) briefed the Committee on the 2014 Division of Revenue Bill (DoRB)

The Financial and Fiscal Commission 
The presentation covered general and specific comments on the DoRB, the national, provincial and local government fiscal frameworks, the government’s responses to the Commission’s recommendations, and the government’s responses to the recommendations of the Standing Committee on Appropriations.

The FFC said that Parliament should consider those recommendations of the FFC to which Treasury had not responded, because they were not directly related to the Budget as they dealt with substantive issues. It welcomed the new provisions regarding deadlines for the repayment of unapproved rollovers, and noted the increased accountability of transferring officers, the call for local government to develop ten-year plans and the increased trend toward indirect conditional grants. The Human Settlements Capacity Grant (HSCG) was a new grant established in 2014, with R900m allocated to it.

The FFC’s comments on the responses to the Committee’s recommendations were that the monitoring and evaluation of provincial and municipal budgets could be improved, that unnecessary rollovers in the Department of Health had to be avoided and that sanitation should be a priority, but that the conditions of the grant should strengthen accountability and that objectives be met within timeframes and that an exit strategy should be in place. The FFC welcomed the overall thrust of the Bill and the idea of setting expenditure ceilings as proposed in the Medium Term Budget Policy Statement (MTBPS).  It supported the new requirements for institutionalising local integrated planning, but was concerned over the growing trend toward indirect grants, as there was a need for systemic interventions to address poor performance.

Members asked if the FFC wanted to have a share in the decision-making, and how this would impact on the independence of the FFC.  They asked if there were fiscal framework issues in the shifting of grants from direct to indirect grants. What was the FFC‘s view of the lack of capacity of municipalities, as this issue had been dragging on for a number of years? What was a workable, implementable plan to overcome this?
At what stage would cuts be made to the rural development or agricultural development grants?  Members asked whether the FFC had checked that the equitable share had gone to municipalities. Had the Department done investigations into the organograms of municipalities?   Members asked for clarification on the Built Environment Performance Plan.

South African Local Government Association (SALGA) Briefing
SALGA’s presentation covered major changes and additions to the Bill, an assessment of direct and indirect grants, an overview of the Human Settlements Development Grant (HSDG) and Urban Settlements Development Grant (USDG) performance, the new Human Settlements Capacity Grant, the Rural Household Infrastructure Grant and other matters with cost implications for local government.

SALGA welcomed the overall sentiment of the budget, but noted a leveling off in local government funding. It also welcomed the new local government equitable share formula, which was sensitive to rural municipalities, the R300m Human Settlement Capacity grant and the R841m Integrated City Development Grant.  A number of grants had had their funds shifted to the indirect grant component because of weak past performance.  

There had been a quantitative improvement in the spending of the HSDG and the USDG, but HSDG spending was declining in real terms. SALGA would be lobbying to extend the USDG to additional large cities.  Other matters with cost implications for local government included the Spatial Planning and Land Use Management Act, 2013 (SPLUMA) which would lead to an increase in municipal budgets because tribunals would have to be established.  In addition, SALGA was committed to a professional municipal service which would have financial implications, as would the Public Administration Management (PAM) Bill.  Unfunded mandates were a significant problem and there was a dire need for a restructuring grant for those municipalities that had to carry the responsibility when municipalities in KwaZulu-Natal and Gauteng merged. Municipal revenues would remain under pressure during 2014/15.

Members asked if the Appeal Tribunal would be permanent or temporary.  Did the Inter-governmental Relations Forum work, given the continued occurrences of unfunded mandates and that this was where the three spheres of government apportioned the funds?  What was SALGA doing about capacity issues at municipalities?  Did the IGRF Act receive support?   Members asked why municipalities were still getting funding after they had failed to implement for two consecutive years. Was there no intervention over the failure to implement?  They said there was a gap in integrated development planning between local government on the one hand, and provincial and national government on the other.

Meeting report

Chairperson’s Opening remarks
The Chairperson said that the Financial and Fiscal Commission (FFC) had been invited to brief the Committee, as it advised Parliament on the Division of Revenue Bill (DoRB). The South African Local Government Association (SALGA) had been invited to brief the Committee because there was a new model for local government in the Medium Term Budget Policy Statement (MTBPS), which took into account the differing abilities of local government to provide services.

Finance and Fiscal Commission (FFC) briefing
Mr Bongani Khumalo, Commissioner of the FFC, said that Parliament should consider those recommendations of the FFC which to which the Treasury had not responded, because they were not directly related to the Budget and dealt with substantive issues.

Mr Eddie Rakabe, FFC Fiscal Policy Programme Manager, said the FFC noted the increased accountability of transferring officers. It welcomed the new provisions regarding deadlines for the repayment of unapproved rollovers and the call for local government to develop ten-year plans.  Metros should be aligned with the integrated development plan, otherwise people would not be getting services, even when there was money available. Indirect conditional grants should be applied, not only to provincial government departments, but to national government departments as well. The FFC noted the increased trend towards indirect conditional grants.

The Medium Term Expenditure Framework (MTEF) for 2014 showed a modest projected growth of 1.5%, with non-interest expenditure growing from R1.5 trillion, to R1.67 trillion in 2016. The provincial equitable share increased by R29.5bn, while local government increased its equitable share by R4.7bn, with an increase in conditional grants of R1.9bn.  Major additions of R7.1bn, R9.2bn and R11.8bn between 2014 and 2016 were earmarked for inflation-related salary increases. Other major additions were to accelerate the delivery of bulk water and sanitation.

The Provincial Fiscal Framework decreased by R200m, while the Provincial Equitable Share (PES) increased from R338.9bn in 2013/14, to R362.5bn in 2014/15, to fund higher wage costs. Conditional grants would grow by 2% to assist with the flood damage of 2013 and because of a new Occupation Specific Dispensation grant for education therapists.  The PES formula had been updated with the most recent census data. Some provinces had a slight negative percentage difference as a result, but this would be countered by a phase-in programme, so that provinces would not find themselves in a worse-off position.

The FFC noted the decrease in the agricultural conditional grant due to underperformance of the grant, arising from poor planning, procurement challenges and a skills deficit. There was a new conditional grant to fast track the eradication of the bucket sanitation system and to provide housing in mining towns, through reductions in the Human Settlement Development Grant (HSDG) and Urban Settlement Development Grant (USDG). It cautioned, however, that old priorities that were still relevant should not be replaced by the new priorities, and there had to be capacity to ensure better work was done. Housing interventions in mining towns should be according to individual household circumstances.

Ms Sasha Peters, FFC Local Government Programme Manager, said the Local Government Equitable Share had increased from R34.3bn in 2013/14, to R36.1bn in 2014/15.   The FFC supported the local government equitable share and conditional grant increases, but said that an equally important point was the building up of financial and technical capacity, accountability and effective service delivery.  There should be a coherence and synergy in attempts to improve capacity. The review of local government revenue instruments was a welcome development. The Rural Household Infrastructure Grant (RHIG) would be split into a direct and an indirect grant for municipalities which lacked the capacity to implement sanitation. The Human Settlements Capacity Grant (HSCG) was a new grant, established in 2014, with R900m allocated to it.

Mr Rakabe said government had responded to eight of the 13 chapters of the FFC’s submission. Three were directly related to the DoRB, and five were indirectly related. The FFC advised that Parliament consider recommendations in chapters 2, 4, 8, 9 and 12 , which had not been responded to because they fell outside the requirements of the Inter-Governmental Relations Forum (IGRF) Act.  Parliament had to exercise oversight on the accepted recommendations and where Treasury indicated existing interventions were questionable. The FFC said that section 214(1) had to be adhered to when new conditional grants were introduced.

The FFC’s comments on the responses to the Committees recommendations were that the monitoring and evaluation of provincial and municipal budgets could be improved, that unnecessary rollovers in the Department of Health had to be avoided and that sanitation should be a priority.  The conditions of the grant should strengthen accountability, objectives should be met within timeframes and an exit strategy should be in place.

In summarising, Mr Khumalo said that the FFC welcomed the overall thrust of the Bill and the idea of setting expenditure ceilings, as proposed in the MTBPS.  It supported the new requirements for institutionalising local integrated planning, but was concerned over the growing trend of indirect grants, as there was a need for systemic interventions to address poor performance.

Discussion
Mr L Ramatlakane (COPE) asked if the FFC wanted a share in the decision-making, and how would this impact on the independence of the FFC. He asked if there were fiscal framework issues in the shifting of grants from direct to indirect grants. What was the FFC‘s view on the lack of capacity of municipalities, as this issue had been dragging on for a number of years? What was a workable, implementable plan to overcome this?  

Mr Khumalo replied that the FFC did not want to do what the Department of Finance had to do, but wanted to protect the integrity of the system. Their concern was in this context, especially with regard to the FFC ‘s input.

On the second question, he said the issue of the shifting of grants was because of a perceived lack of capacity. The first responsibility was at national level, as the Constitution enjoined national departments to build capacity in municipalities.

Mr M Swart (DA) asked who would be responsible for the investigations concerning the lack of progress referred to in slide nine of the presentation. 

Mr Khumalo replied that the Department of Cooperative Governance and Traditional Affairs (COGTA) and the Treasury had had discussions, and in the review had excluded district municipalities. District municipalities were in dire straits. When provincial executive decisions were taken, there was no consultation from MEC’s regarding district municipalities, and this resulted in serious financial implications for district municipalities.

Ms R Mashigo (ANC) asked at what stage cuts would be made to the rural development or agricultural development grant. Regarding the equitable share of municipalities, she asked whether the FFC had checked that the equitable share had gone to municipalities. Had the Department done investigations into the organograms of the municipalities?

Mr Khumalo replied that those grants had been underperforming for a long time -- since 2005/6.  They needed to be restructured and be more responsive to needs. There had been engagement on whether some grants were in the wrong department. A technical team had been established to review these grants.

Mr Rakabe said, with regard to the Built Environment Performance Plan (BEPP), that planning needed to be done over ten years.

The Chairperson said that in the past, the Department had had to use not more than 4% of the grant to build capacity. What was the FFC’s view?
 
Mr Khumalo said that the 4% was a FFC recommendation, but this condition had since been removed.  However, capacity building was supposed to be a part of grant design. A rethink was needed around these issues. There were challenges around grant design, like in RHIG for example, but what was learnt from them was also important.

Ms Malijeng Ngqaleni, Acting DDG for Intergovernmental Relations at National Treasury, said Treasury were not proponents of indirect grants or the fragmentation of these grants. These indirect grants were a response to urgent service delivery challenges by the executive.  RHIG had been made into a direct grant.  Where    municipalities performed, they would get direct grants and where they were failing, they would get indirect grants -- as had been done in the case of health and education. For the first few years, there had been crisis management. On the matter of how, as a department, it was ensuring the capacity development of provinces, one needed to look at capacity in two areas -- oversight and support capacity, and implementation capacity. After three years, direct grants would be phased back to provinces. Treasury could thus respond without having to take over everything.

The Chairperson said capacity planning should be checked up on, even at national level.

Mr Ramatlakane said the Committee needed to engage further with Treasury on its response.

Ms Wendy Fanoe, Chief Director in the Treasury, said the grant framework still had capacity provisions for the provinces.

The Chairperson asked for clarification on the BEPP.

Mr Rakabe said BEPP was a ten-year council-approved plan on how to align the infrastructure grants found in the DoRB.

South African Local Government Association (SALGA) Briefing
Mr Subesh Pillay, SALGA NEC member for Finance, said SALGA welcomed the overall sentiment of the budget, but noted a leveling-off of local government funding. It also welcomed the new local government equitable share formula, which was sensitive to rural municipalities which had lower revenue-raising potential. It welcomed the R300m Human Settlement Capacity grant and the R841m Integrated City Development Grant.  A number of grants had had their funds shifted to the indirect grant component. In total, R36.1bn would be in direct conditional grants and R7.7bn in indirect grants.  Part of the municipality’s mandate was to build capacity at the local government level. Because of weak past performance, R460m had been shifted from direct to indirect grants at municipalities with weak past performance.

There had been a quantitative improvement in the spending of the Human Settlements Development Grant (HSDG) and the Urban Settlements Development Grant (USDG), but HSDG spending was declining in real terms. SALGA would be lobbying to extend USDG to additional large cities.

The new HSCG would become available only in July 2015, so metros had an opportunity to develop their plans. The success of metro housing programmes was dependent on capacity-building, which sat at the provincial level.

RHIG was welcomed, as it was a new direct grant which would strengthen the capacity and accountability of local government.  However, there were still difficulties with its rollout, as R107m had been allocated in 2013/14 but no expenditure had been recorded. A dual approach had been introduced, where R48m would flow directly to municipalities with approved business plans, while the rest was spent by the Human Settlements Department through a service-level agreement.

Other matters with cost implications for local government included the Spatial Planning and Land Use Management Act, 2013 (SPLUMA), which would come into operation in 2014/15.   This would lead to an increase in municipal budgets, because tribunals would have to be established consisting of qualified professionals, who had to be appointed to adjudicate.  In addition, SALGA was committed to a professional municipal service and this would have financial implications, as would the Public Administration Management (PAM) Bill.  

Unfunded mandates were a significant problem, with many historic functions predating the previous dispensation. While there was no disagreement on the mergers of municipalities in KwaZulu-Natal and Gauteng, there was a dire need for a restructuring grant for the municipality that would carry the merger responsibility, and a due diligence process should begin currently so that merger costs could be identified and funding sourced. Municipal revenues would remain under pressure during 2014/15.

Discussion
Mr Swart said he did not agree with the mergers referred to in slide 11. He said the planned tribunal had to be established with experienced personnel sitting on it. He asked if the Appeal Tribunal would be permanent or temporary.

Mr Ramatlakane said the Committee had to consider the recommendations it would make in its report. One always heard about ‘unfunded mandates’. He asked whether the Intergovernmental Relations Forum worked, given the continued occurrences of unfunded mandates and given that this was where the three spheres of government apportioned the funds. On the FFC’s comment on the capacity of municipalities to deal with direct grants, he asked if the names of these municipalities were available and what interventions had been put in place. What work was SALGA doing around capacity issues at municipalities? Was something serious being done regarding the lack of capacity?  Did the IGRF Act receive support?  

Ms N Mkhulusi (ANC) asked about the failure of municipalities to implement funds.  If municipalities were failing to implement for two consecutive years, why did they still get funding?  Why was there no intervention on the failure to implement?

Ms Lorette Tredoux SALGA Executive Director: Governance and Intergovernmental Relations, said the tribunal would be appointed for a period of three to five years, but would sit only when needed. SALGA was pushing for a district appeal body made up of outside experts, who would be paid a stipend. Regarding the IGRF Act, she said the local government turnaround strategy had been introduced to realise integrated planning, but five years later this was still a dream. Planning should start at the local government level, otherwise one would end up, as had happened, with houses being built without provision for electricity and schools being built without the provision of water.  SALGA wanted a bottom-up approach.

Mr Swart said a district appeal body would not work, and asked who would pay if an appeal was lost.

Mr Ramatlakane said he had assumed that planning was driven by a bottom-up approach, but it appeared there was no consolidated, integrated development planning.

The Chairperson said there was a gap in the integrated development planning between local government on the one hand, and provincial and national government on the other.

Regarding the USDG and the HSDG, Mr Pillay said that while the cost of the housing subsidy had increased, the available funds had remained the same, which meant that fewer houses would be built.

Mr Ramatlakane asked how that was possible.

Ms Ngqaleni said that it pointed to the fact that the cost of delivering houses had increased. While the nominal subsidy was R92 000, the actual figure was R200 000 and the subsidy had been adjusted to R140 000. If municipalities were funding unfunded houses, the municipalities would soon go bankrupt, therefore they chose to buy land further away from the center of town where the land was cheaper. The USDG allowed planning to be driven using regulatory instruments to accelerate the provision of housing.

The Chairperson said the Committee would be meeting the Human Settlements Department on the coming Friday, where the matter could be discussed further and he asked the presenters to be present. He thought that Treasury would respond by saying that Service Level Agreements and capacity-building should be included in the grants’ design.   The matter of whether the IGRF was working needed to be revisited.

The meeting was adjourned.

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