2014 Division of Revenue Bill: Public hearings

Meeting report

Mr C de Beer was appointed to act as Chairperson as Mr Chaane's flight had been delayed. Mr T Chaane (ANC, North West) resumed the Chair at about 12:00.

2014 Division of Revenue Bill: Public hearings
The Acting Chairperson noted that in order to divide revenue it first had to be collected and it was very important to decide how it must be divided. No matter which party they represented, the MPs had to understand where the money came from and how it was divided and their role was to engage robustly with ministers and departments appearing before the Committee.

South African Local Government Association (SALGA) submission
Mr Subesh Pillay, National Chair; National Working Group, South Africa Local Government Association, noted that SALGA welcomed the overall sentiment behind the Division of Revenue Bill (DORB) particularly the economic climate. The budget supported the vision of building a capable state and gave content to some of the format. The alignment of the 2014 budget to the National Development Plan (NDP) was critical. There was a need to work with business by creating an environment to create jobs. There was a focus on infrastructure expenditure and that would have an impact on growth and creation of opportunities. He welcomed the call to curtail expenditure.

SALGA noted the trend to a plateau on local government funding was noted, but maintained that some of the challenges facing local government in fact warranted more budget being allocated. However that was probably something to be addressed in other forums. The impact of the new local government equitable share (LGES) was welcomed and 50% more was allocated to rural and district municipalities. SALGA also welcomed the new Human Settlement Capacity Grant of R300 million to six metro municipalities, and the shift to indirect components of the grants. The incentives introduced for development of more integrated and developing cities was also welcomed. This began to acknowledge and contribute to the role of the bid cities in stimulating national economic development. Additional funding was made available through subsidies to provision of basic services.

He noted that R36 billion was to be allocated to municipalities through direct conditional grants and R7.87 billion would be spent on their behalf through indirect grants. Funds were reduced from municipalities with weak past performance, and R460 million was shifted from the direct integrated national electrification programme to indirect grants. SALGA noted that there was a possibility to convert funding to indirect grants but he cautioned that whilst the country needed to strike a balance in spending it must not be oblivious to the requirement that municipalities should be allowed to develop their own capacity to spend on the grant.

He tabled an overview of the Hunan Settlement Development Grant (HSDG) and the Urban Settlement Development Grant (USDG) noting that there appeared to be improvements. There was 93% spending for 2013/14 in the USDG.

He noted that the USDG was increasing by 13% nominally in 2014/15 with a 1% increase on the HSDG, but that, in real terms, taking inflation of 6.2% into account it was in decline. This must also be seen against increases in the housing subsidy, which probably would limit ability for delivery of top structures. This year, SALGA would be asking the National Department of Human Settlements (DHS) to extend the USDG to additional large cities. It was also working with that Department to amend existing housing subsidy programmes to enable their application to backyard dwellers and other support to these dwellers.

The new Human Settlements Capacity Grant would provide R300 million funding directly to the six metros who were being assigned the housing function, and that was intended to cover operational costs. This would happen from 1 July 2015, which would allow a full year for metros to use this grant to get their houses in order. The provincial departments must move quickly to provide full information, and Mr Pillay pointed out that clear plans would be needed to provide detailed technical assistance. Risks must be managed so that the metros were not set up to fail, and to ensure that there were no dips in financial or non financial performance.

The Rural Household Infrastructure Grant (RHIG) had struggled to perform since inception, with only 66% being spent in 2012/13, and SALGA thus welcomed the conversion to an indirect grant, which it believed would improve the management. However, there had still been difficulties in 2013/14 with rollout, despite the conversion to a direct grant. He showed a graph of performance (see slide 9). 42% of the grant would flow directly to municipalities on approval of business plans while the remainder was spent directly by the DHS via a service level agreement. By the outer years, the entire allocation should be disbursed directly.

Mr Pillay then noted that local government would be placed under increased pressure in the coming years. He said that the Spatial Planning and Land Use Management (SPLUM) Act was expected to come into operation in the 2014/15 year and this would need more budget as municipal planning tribunals would have to be set up. In order to give full effect to the provisions, municipalities would be required to take on a number of processes and prepare new land use schemes, which would require reviews of policies and bylaws. There would be cost implications, in having to appoint new staff and pursue contraventions. In addition, he pointed out that the regulations on appointment and conditions of employment of senior managers prescribed certain staff structure requirements and basic departmental structures, which would carry further cost implications. Capacity assessments had to be done for all municipal managers.

The Public Administration Management (PAM) Bill, recently passed by Parliament, would also imply financial implications for municipalities. Although SALGA had requested the costing, it had not been provided. The compatibility of integrated systems was provided for, but the extent and cost were unclear.

Mr Pillay said that unfunded mandates were still a significant problem for local government. This could be minimised if parties did properly adhere to legislation around assignment of functions. SALGA recommended that National Treasury (NT) should review the extent of compliance with legal procedures for the assignment and delegation of functions. He said it was important to develop minimum norms and standards. He gave the example of a metro providing 20 ambulances, and said that although provision of ambulances was in fact a provincial function, the question was, if the province was only prepared to fund 13 of those ambulances, whether the province was regarded as under-funding, or the metro was regarded as over-providing. Municipalities were faced with a choice of either reducing the level of service, or continuing to provide and pay for the service. He believed that national uniform norms and standards should be established to guide what services and costs were provided. He said that provincial assignments should be done – but were not –through formal agreements. He suggested that MECs for finance and municipal councils should be monitoring this, and MECs for Finance should be ensuring that the funds were budgeted for, and the transfer of funding actually happened when it was gazetted.

He also noted that a number of municipalities in KwaZulu Natal (KZN) and Gauteng would be merging, and this would have to start in 2014. Past experiences had shown the dire need for the establishment of a restructuring grant, and that was supported also by the Municipal Demarcation Board. Tshwane had needed to fund about R1.5 billion already for its merger.

Mr Pillay concluded that municipal revenues remained under pressure, and the continued greater involvement of organised local government in the budget process was acknowledged. SALGA would continue to participate in the review of the fiscal framework, review the funding sources and monitor the cost of providing free basic services.

Discussion
The Acting Chairperson said that it would be interesting to do an analysis of money spent since 1994 on local government capacity building programmes – he was sure that this was billions of rands. When the Committee had met with the local government wing in the NCOP, this matter was high on the agenda, with specific reference to the training of officials in understanding the Municipal Finance Management Act (MFMA) and what they were expected to do.

Mr B Mashile (ANC, Mpumalanga) said that many of the comments from SALGA amounted to complaints. He had understood that the Intergovernmental relations framework and the option for SALGA to take up its positions in the NCOP should have enabled it to interact far more widely with any government structure. All the problems around unfunded mandates were, in his view, very widely stated, but he reiterated that SALGA had plenty of opportunities to address this in other forums. There had been a query about the flow of information to the municipalities. He suggested that surely SALGA should be making more use of the opportunities that it had, to ensure that local municipalities did their work. The cities already knew that they were to receive funding, and the conditions under which they would be paid, and surely they should have sorted out the issues of capacity already. He recommended that SALGA should and the municipalities use the opportunities open to them, particularly the positions that were available in the NCOP, as that would ease the position of SALGA. He thought it unfortunate that SALGA acted “as visitors” rather than participating more actively in Parliament.

Mr R Lees (DA, KwaZulu Natal) supported the views of FFC, and thought that SALGA's constituency should be fighting against the indirect grants. He felt that SALGA was giving out mixed messages on the indirect grants.

Mr Lees was not sure what SALGA was proposing for backyard dwellers, as they were essentially tenants, and he asked what was being suggested.

Mr Lees agreed with Mr Mashile that the question of capacity was raised over and over again. He wondered what in practice would be changing; the devolution of functions to metros was really a paper arrangement, as he pointed out that the metros had been dealing with housing as agents for a long time. He asked why SALGA was now suggesting that there was suddenly a need for capacity building, as nothing had effectively changed.

Mr Lees said that the RHIG grant had halved over recent years and then remained low. He asked if SALGA was happy with the quantum, let alone the lack of capacity to spend.

Mr Lees was not sure why SALGA was suggesting that the financial position of municipalities would be affected by the passing of the SPLUM Act. There had been zonings for many years, and contraventions had occurred and had needed to be dealt with for many years too, although recently, illegal structures were being erected and municipalities either did not have the will or the expertise to deal with them. 

Mr Lees noted that slide 12 dealt with appointments and minimum standards for departments. He asked whether SALGA had done a costing and was thus able to say to NT that this would be the cost of implementation for X or Y municipality. General statements were not getting the Committee anywhere, and he agreed with Mr Mashile that more specifics were required. The same comments applied to the Public Administration Management (PAM) Bill. He asked how SALGA had dealt with it – and asked whether there had been public hearings or lobbying.

Mr Lees also noted that the unfunded mandates were an oft-repeated concern, but felt that the solution was quite simple – municipalities should be taking a very firm stance and say that they would not deal with the function, putting it straight back on the shoulders of the correct functionary.

Mr Lees asked if SALGA had done a costing exercise also in regard to the boundary changes, and said that it was not enough to suggest that Tshwane's boundary issues had cost R1.5 billion, but he thought more analysis was needed on why it had cost so much, and whether it was possible to cut that.

Mr D Joseph (DA, Western Cape) noted that SALGA had acknowledged the shortage of skills as one of the reasons why municipalities were unable to implement projects. However, he wanted to know what proposals SALGA had made to improve that; this was a recurrent complaint.

Mr Joseph said that he had not heard SALGA speaking to the IDP and whether it was monitoring capital allocations to improve the IDP.

Mr Joseph agreed with other Members that SALGA needed to give more specifics on the costing of the PAM Bill. Some interesting points had been made, but it should have gone into more investigations. Similarly, the costings for transfer of skills and staff under the PAM Bill were needed. Taking his colleagues' comments on unfunded mandates a step further, he suggested that municipalities should send accounts to provinces for the services that they were providing – whether library or ambulance services. There was significant money in the provinces that had not been spent.

Mr Pillay said that there was no single forum available to SALGA, including the NCOP seats. It participated in the budget forum and many of the issues raised here were addressed also there, and his remarks today could be seen as additional to points raised previously. SALGA did participate across Parliament. He made the point that these were continuing challenges and that was why SALGA continued to raise them. The LES formula had been reviewed and SALGA had participated in that process. SALGA was constitutionally obliged to raise the issues. He submitted, with respect, that SALGA had made every effort to not only highlight the problems but also suggest how they could be resolved.

In regard to the housing function, he agreed that the metros had been in part implementing the function in the past, but he pointed out that there was a difference, as the provincial departments of housing sat with entire staffing structures and units, including the administration of the housing beneficiary lists, which now, in terms of phase 1 accreditation, had been moved to local government. This was not merely a paper exercise, as suggested by Members.  There were projects sitting with regional professional teams, managed by and staffed by the provinces. All of that had to be ring-fenced and transferred to local government. However, if the provinces were not diligent and dutiful in unfolding that process, SALGA was worried that there would be implementation problems. SALGA wanted merely to caution that there was a need to ensure a smooth transition to Level 3 accreditation.

Mr Pillay wanted to clarify SALGA’s position on the direct and indirect grants. SALGA did not favour the increased trend to indirect grants because it believed capacity was needed at the sphere of government to discharge the function. The point that it was making in its presentation was that SALGA believed that primary attention must be paid to developing the skills set within local government, in order to enable the municipalities to discharge their service delivery mandate. SALGA noted, but was not supportive of, the increasing trend to indirect grants and believed that capacity must rather be created in the local municipalities.

In relation to the rural infrastructure grants, SALGA was not happy with that either. He reminded Members that SALGA had expressed a caution about the trend to plateau the grants. However, the bigger question was whether there was not a need for a more principled approach to the broader fiscal relationships rather than a narrow focus on grants. Grants would not solve the broader fiscal problems in local government. SALGA did not support the decrease of the grants, particularly not the RHIG.

Mr Pillay noted the various comments on the costings. Commenting on the implications of the SPLUM Act, he said that currently the municipal planning tribunals were constituted by employees, who were paid their normal salary, and councillors and other support officials. However, the new Act provided that the municipalities must create new Municipal Planning Tribunals, which were external units that must have capacity and competence. That would carry new cost implications, and the same also applied to the appeal tribunals. Speaking to the contraventions, he agreed that there were currently regulations under the National Building Regulations and application ordinances, but they provided that a municipality could only provide a transgression notice and give the transgressor 21 days to put the matter right. If the transgressor did not comply, the municipality would have to get an order to comply. The Magistrates Courts had tended to treat these as minor misdemeanours and generally imposed admission of guilt fines, but had been very hesitant to exercise the powers (although it could do so) to issue demolition orders, which meant that the municipality then had to approach the High Court to get order for demolition, which came with high legal costs. The requirements for municipalities to act on contraventions were in place, but in practice these depended on the ability of the courts to support the process.

In relation to the PAM Bill, the Municipal Demarcation Board processes and others, Mr Pillay assured the Committee that SALGA had prepared detailed submission papers, via the working groups, to the respective portfolio committees, and they could be forwarded to this Committee if required. He was trying to make the point here that when these pieces of legislation or processes finally came into operation, they would have fiscal implications on municipalities, which would have to be addressed. The Financial and Fiscal Commission (FFC) had also said that the processes culminating in legislation should involve better scrutiny by committees. Sector departments would look at their sector priorities, but there was not necessarily a focus on the overall financial and fiscal implications, and this was perhaps due to the FFC not being consulted much earlier.

He noted that the SALGA had not done detailed cost implications, but the overall conclusion was that there would be “significant” implications on the sector. That was also applying to the mergers.

Mr Mashile indicated that the Committee was not trying to suggest that Mr Pillay had not raised some relevant pints, but had wanted to stress the difference between merely raising matters and getting them resolved. His point was that SALGA should be doing more to actually resolve the issues; for instance, it should be working out the cost implications on legislation and raising these issues with the sector departments. He did not feel that it was proactive enough, despite the fact that it had opportunities to do so. He agreed with the questions posed by Mr Lees, saying that he too wondered why SALGA was not taking specific action to ensure that interventions were actually made, or making more plans and engaging with the right people. He suggested that SALGA was behaving “like an NGO” instead of insisting that there were actually services provided in municipalities.

Mr Lees emphasised that he was not attempting to trivialise the problems, but agreed with Mr Mashile that SALGA needed to do more. He repeated his question about backyard dwellers.

Mr Pillay answered that there were ongoing discussions that perhaps backyard dwellers needed to be brought into the subsidy system, so that instead of opting for a serviced site and stand, their subsidy could be applied to formalising the backyard dwellings that they occupied. Backyard dwellings were symptomatic of the fact that the current housing programmes were insufficient to respond to the demand for housing, hence people started to reside in backyards. It was suggested that they too should be able to get subsidies, and for the second dwellings in the backyard to be properly approved from a municipal planning point of view, then able to be subsidised.

The Chairperson noted that Local Government Week would be held in August / September.

Financial and Fiscal Commission (FFC) submission
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, said that the Financial and Fiscal Commission (FFC) made its submission in terms of Chapter 13 of the Constitution. That was important because of the nature of the recommendations and response.

FFC welcomed the main changes in the DORB, which he summarised as:
- increased accountability for transferring officers
- deadlines for repayment of unapproved rollovers
- incentives and support for integrated cities. FFC had emphasised the need for this in around 2011.
- incentives for planning and spending of provincial infrastructure conditional grants
- increase of the indirect conditional grants. However, FFC was perhaps a little more sceptical on this than SALGA. It was incorrect to assume that spending would automatically happen if national departments took responsibility. There had been discussion with National Treasury on this, and it was agreed that in the current weak cycle the FFC would be doing some more research into this move. The change would have implications or the whole system of grants and the FFC believed that this was a reversal of the changes that had earlier been made in 2003, which were trying to deal with the problems of indirect grants.

The response of the Minister of the Finance to the FFC's recommendations that were tabled in May last year had been presented to the FFC during a number of meetings. When the Money Bills legislation was introduced, there had been an agreement that the FFC would put all recommendations in one document. However, it was agreed that the Minister needed only to respond on matters directly related to the DORB. Parliament as a whole would have the responsibility of responding to issues not taken up by the Minster of Finance – such as those relating to the fiscal framework.

Mr Khumalo said that the FFC would later comment on some issues raised by SALGA – particularly the unfunded mandates and the problem of Tshwane. A report would be finalised on the aftermath of the Tshwane merger and would be shared with the Committee shortly.

Mr Eddie Rakabe, Researcher, FFC, tabled a slide showing the division of revenue between the spheres (see attached document, slide 3) and said that there was moderate growth. The 2014 budget maintained the momentum on fiscal restraint. The largest part still went to national government but the provincial share was at 43.3%, and he summarised the actual figure increases (see slide 4). The major additions to the Provincial Equitable Share (PES) went to the provincial wage bill, and bulk infrastructure, to accelerate delivery of bulk water and sanitation, and it might be necessary to increase this again, in light of recent disasters in Limpopo and North West.

Looking at the provincial fiscal framework overall, he noted that it had been revised downwards by R200 million, over the 2013 MTEF, but this was not an overall decline, as there was a rise in the provincial equitable share. Conditional grants would be growing by only 2% in real terms, mainly to fund flood damage and for providing a new Occupation Specific Dispensation grant for education therapists.

Last year, the PES formula was reviewed in light of the census statistics. Several provinces experienced decline because of movement from those provinces, particularly Limpopo and Eastern Cape. That had been dealt with through the phasing in of the PES changes over three years, which the FFC welcomed.

The FFC noted the decline in the agriculture conditional grants, which had been performing badly, but cautioned that the impact of this reduction on food security would need to be considered, particularly in light of the fact that levels of poverty were increasing. It welcomed efforts to improve efficiencies, including leveraging private sector funding and improving coordination. A new provincial grant was introduced to fast-track bucket sanitation eradication, and housing in mining towns. The FFC welcomed the grants, but sounded a note of caution, that old and still relevant priorities should not be replaced with new ones. The housing subsidies were insufficient to address the housing needs. There was a need to ensure that capacity existed to ensure that better work was done within the appropriate grant frameworks. Interventions in mining should respond to individual housing circumstances.

Ms Sasha Peters, Researcher, FFC, took Members through the local government fiscal framework. The LES allocation would be R147.6 billion over the three years, and given the significant service delivery responsibilities allocated to local government, FFC welcomed the improvements in these allocations. She reported upon revenue equity amongst municipalities. The FFC felt that there were other objectives that were important – such as ensuring accountability and financial and technical capacity building. More coherence and synergy was needed, particularly considering the numerous grants and interventions such as the setting up of the Municipal Infrastructure Support Agency (MISA). In terms of stability and certainty, she noted that the three year Medium Term Expenditure Framework catered for this, and FFC recognised that policy reprioritisation was part of the process, but urged that any shifting of focus should be done as smoothly as possible..

The FFC welcomed the focus on eliminating corruption and a number of municipalities were improving their internal controls and fraud prevention techniques. In light of increased local government revenue sources, the FFC also welcomed the review of own revenue sources that was under way, and the review of local government infrastructure grants. Whilst there were a number of stakeholders involved in the processes – such as SALGA, FFC and the Department of Cooperative Governance (DCOG), the FFC was still worried that persistent challenges such as unfunded mandates and capacity challenges would reduce the impact of the reviews.

Ms Peters repeated that the Rural Housing Infrastructure Grant (RHIG) was to be divided into direct and indirect components. It targeted rural municipalities that lacked capacity, The FFC thought that the direct component should be based on assessment of the capacity required within the municipalities to implement the grants. Capacity constraints had been raised before and the FFC recommended that government must review the capacity building grants and programmes, looking at design, implementation and outcomes.

She said that a new local government conditional grant – the Human Settlements Capacity Grant (HSCG) – had been established. Given lack of synergy amongst capacity building interventions, the FFC recommended that there was a need for coordination and synergy.

In the local government sphere the FFC welcomed the review of the LG infrastructure grants but thought that broader issues of governance and capacity must also be considered in the review.

Mr Khumalo summarised the government response to the FFC recommendations. He repeated that not all the recommendations in the report had been responded to. There had been intensive consultations with the NT and the Commission Secretariat. He highlighted that there were recommendations that had been accepted and where government had said that some existing interventions were in place. In the past, stakeholders had asked what had happened on certain recommendations. He highlighted that the effectiveness of the function budgeting and groups, the Further Education and Training Colleges turnaround strategy and the restrictions on the government wage bill were already on the table and he recommended that Parliament should monitor to check that responses did speak to what was happening. He said that consultations normally took place between the FFC and NT, although FFC was not normally in direct contact with other departments, unless there was something specific to consider. The FFC's mandate was to make recommendations on division of revenue, and not just the equitable share. Many grants were, in practice, introduced or stopped, without the FFC being consulted. By that stage processes had gone so far that it was impossible for the FFC to work on matters as it needed at least 90 days to put in well-informed recommendations. When departments proposed grants, this information should be shared. There was discussion between the secretariats of the FFC and the NT – which were not elevated further, but he raised this point to stress what was in the Commission's mandate in terms of the constitution.

He concluded that the FFC welcomed the overall thrust, and believed that it would promote future growth, budget moderation and sustain costs spending, although it had not seen any cuts. It welcomed the attempt to match the budget to key pillars of the NDP, and that showed commitment and credibility of the process. FFC recommended that the setting of expenditure ceilings should be done through an evidence-based process, with studies also done retrospectively looking into the impact of the ceilings. The new requirements for institutionalising local integrated planning were supported. There was concern, however, over the growing trends of indirect grants and he emphasised again the need to make systematic interventions to address poor performance rather than merely shifting the spending to address current failures.

Discussion
Mr Mashile said that the FFC should continue to demand what was right and correct, and persist in its suggestions until it was properly listened to.

Mr Mashile noted that he was not in agreement with the FFC on slide 9, relating to the suggestion that there must be an assessment of the capacity of municipalities to deal with the grants. In his view, this would merely perpetuate the current situation, which he thought disadvantaged the rural but advantaged the urban municipalities, who tended to have more capacity, and could result in many local municipalities not receiving what was due to them. He agreed that when a province or municipality did not have capacity, the split of grants into direct and indirect portions merely resulted in a delay of the municipality actually providing service delivery. He suggested that it was necessary to actively create capacity, and follow it up with resources. People being trained at the moment were unwilling to work for the rural municipalities. He also noted a trend of people being unwilling to attend formerly-disadvantaged universities, which merely enhanced the divisions. It would be necessary to deliberately force capacity building, so that over time municipalities were able to receive resources and deliver services.

Mr Lees said he would be interested to hear the answers to Mr Mashile's query on ability to spend. Mr Lees noted that the FFC was probably accurate in saying that there had been disruptions around service, but asked what indicators could be cited.

Mr Khumalo said that FFC, when making the recommendations, had been looking at the grant system in totality and considering the responsibilities of differing role players. In its discussions with NT, the FFC had asked what the requirements should be when a national department took over a grant, making it into an indirect grant. Whatever the national department did must be synchronised with the municipality’s actions. He asked Members to remember that this was intended to be a temporary arrangement that resulted from present lack of capacity in the municipality. The FFC pointed out that at the moment, there was nothing said about the exit strategies, and believed that the intervention should also imply that the national department must take responsibility for re-aligning the municipalities' own capacity, to allow the municipality to get to a stage where it could take back the grant fully. The idea behind the split in the grants was to lead to a tightening of the grant framework. There must be an assessment of what exactly was causing the failures for this to happen.

Referring to the RHIG trend, Mr Khumalo noted that the cuts were made because of the lack of performance. However, he repeated the view that it was necessary to look at capacity to spend, at both national and local government level. Often, when national departments took over, they would use the same service providers and there would not be any improvements in delivery.

Ms Wendy Fanoe, Chief Director, National Treasury wanted to comment on indirect grants. She highlighted that there was not just one reason why grants were created; some were because of historical or legacy issues, such as Eskom providing distribution, and water schemes administered by Department of Water Affairs. There were processes for the transfer of these. Over the last three years there had been a drive to introduce indirect grants. The RHIG was introduced as a pilot, to look at non-conventional connector service solutions for sanitation. However, over time it was converted to something else, and the innovation part of it never happened. She pointed out that pilot projects had been successful and appropriate in the health sector, such as the piloting of the National Health Insurance (NHI) in some municipalities. She pointed out that the allocation process actually took needs into account, so it was not correct that indirect grants might benefit some municipalities over others. After the decision on what amounts would be allocated, a decision would then be taken whether the grant was to be an indirect or direct allocation. Some grants had both components. She gave the illustration that the RHIG was handled by the DHS submitting a list of what had to be funded, and then later doing the split on an assessment of the capacity.

Ms Fanoe said that she noted the suggestions of Mr Mashile and agreed that more work was needed on the capacity-building grants. She said that a local government infrastructure review was being one to inform the local government capacity-building grants. A lot of money was spent on capacity-building, but it was difficult to see the outcomes.

Mr Mashile thought that some of the advice of the FFC could have unintended consequences and he proposed that the FFC should look again at the issues. He pointed out that the incentive scheme on the EPWP had never benefited the small municipalities, and it had been taken up by the metros. He would not like their advice to lead to non-delivery of service in the small municipalities, driving people to migrate to the cities. If a particular grant could not be taken up because of lack capacity, then a plan must be devised, perhaps that the province could temporarily take over on behalf of the municipality but then he would like to see another in-line grant running simultaneously seeking to correct the capacity issues. If this was not done, he feared that things would be “done for the municipalities for ever”. Replacement grants must address the real challenges so that over time the municipalities could take back service delivery.

Mr Khumalo confirmed that it would be useful for the FFC and Committee to look into whether there were any unintended consequences.

Mr Lees asked what view the FFC took about there no longer being a contingency reserve, and asked where the funding would come from in the next year.

Ms Tanya Ajam, Commissioner, FFC, said that the contingency reserve was supposed to be drawn down. If there was proper economic growth, the whole fiscal framework would loosen and there would be a trickle-down effect, so growth was crucial. Many growth factors were determined by the external economic environment.

Mr Lees said that there seemed to be a problem with the grants, and the backlog. However, he asked if the problem lay more with the design of the grants, or the demand for housing. He wondered if people should not be asked to provide their own housing. He asked if FFC believed that there was a possibility of any government ever meeting the housing demand, whether through rental stock or any other design.

Ms Ajam said that this question was essentially asking whether, if economic growth happened, people would be able to self-build, and the answer to that was no, because the present markets were incomplete and exclusionary. There were no credits for self-building of a house, which was somewhat surprising given that consumer credit was quite readily available. There were problems with the market and state provision. The public hearings that FFC had held had suggested that the supply side model of free housing was unsustainable and that the houses provided were not meeting targets for quality, quantity or good location. Young people may want inner city housing at one point, but tended to move out to suburbs when they had their families. The current models were not affordable and the backlog was a growing target. The housing grant policies had recently changed, with more spending per subsidy, and that could be useful if it was to ensure densification or better quality. However, the grants structure had not changed in line. Even a doubling the subsidy would only deliver half the housing if the grant structure stayed the same.

Mr Rakabe wanted to add to the comments made earlier about proposals on the backyard dwellers, and said that in the previous year, the FFC had done a study of alternative housing instruments, looking at the different types of subsidies. The funding was insufficient to deal with the demand. The basic principle was that different people could require different interventions, and the current “one size fits all” RDP housing offering did not take into account that some people might want to rent a backyard, which was why there were proposals to include that option also.

Mr Rakabe commented on disaster funding, saying that FFC had made recommendations that municipalities and provinces must fund for disasters in their budgets, although that was difficult as both the possibility and extent of disaster were unknowns.

Ms Fanoe added that there was more than one source of disaster relief funding. There was a shorter term grant, Disaster Relief Grant that was paid out to grant immediate disaster relief; in 2013 an amount of R188 million was paid, of which local government received 346 million. Rehabilitation costs would be funded through the budget process. If not spent, then they must be returned. She suggested that it was up to the DCOG to “get its house in order” to ensure full spending and delivery.

The Chairperson said that it was very important for committees to engage with quarterly reports of provincial departments and provinces. The Parliamentary staff would be holding an induction process for the Fifth Parliament and should stress this point. This Select Committee engaged with the nine provincial treasuries to get pictures of spending in the different departments, and, after May, the Select Committee on Appropriations would have to zoom in on specific areas – for instance, to see why the Northern Cape agricultural grants were not performing, despite the fact that this was essentially an agricultural province.

Mr T Chaane (ANC, North West) asked whether the bucket sanitation eradication grant was to be a direct or indirect grant. In the past, a similar grant had existed, but municipalities had performed badly and could not meet their deadlines, and there had actually been an increase in the use of buckets. The Human Settlements Development Grant (HSDG) still had an element for bucket eradication, over and above the new grant, and he asked how the two differed or spoke to each other. He wondered whether the bucket system would ever be eradicated, because there was no legislation to control the mushrooming of informal settlements.

Mr Rakabe agreed that the bucket eradication had been a priority of government for some time and there had been a number of instruments, but none had worked entirely. He agreed that new grants had to draw lessons from why previous instruments had not worked, and address the challenges that had been considered, when formulating the new bucket eradication grants and ensure spending.

Ms Fanoe answered Mr Lees’ question as to whether the backlogs could ever be addressed, by saying that this was possible if the population either diminished or remained stagnant, but this was not currently the case. She said that it was necessary to go further back and ask why buckets were being used. The mushrooming of and size of informal settlements, and lack of bulk had first to be addressed before considering how then to eradicate bucket sanitation. Many of the informal settlements were not proclaimed – that was a policy matter – so it was also necessary to look into how to deal with interim services. There were various grants that targeted the bucket system. The new grant was an indirect grant, administered by DHS in collaboration with Department of Water Affairs (for the bulk issues) and DCOG. The existing grants were also reformed, with funding now coming via direct and indirect grants. The regional grant dealing with provision of bulk infrastructure would focus on buckets, and there would also be elements through the Municipal Infrastructure Grant and MISA interventions. Again, she noted that there would not be an attempt to reach a single solution; the programme would have to try to determine the appropriate solutions for each of the different municipalities, to try to get sustainable solutions. The Urban Settlements Development Grant (USDG) also earmarked bucket eradication, so there was a multi-pronged approach that would continue. Again she stressed that the bigger question was how to deal with large-scale urbanisation and informal settlement upgrading.

Mr Chaane noted that the Minister of Finance had spoken of an expenditure ceiling, but asked how NT had arrived at that ceiling, and what the views were of the FFC upon it. Some other countries were using something similar. He also asked what would happen if debt rose above that ceiling.

Mr Khumalo said that in most cases, expenditure ceilings were decided on a rule of thumb. Where there were few norms and standards this was quite a difficult exercise. He said that the FFC supported the idea of having ceilings but felt that, in retrospect, the country should be able to collect information to allow for a more objective determination. There should be market aggregates, and the country should be asking what it would be able to sustain. It was necessary to take into account the need to develop infrastructure, job creation and the social wage, none of which should be negatively impacted upon by any changes in the aggregate. Readjustments would be needed. This had been picked up during the Mid Term Budget adjustment process, and when the budget was tabled it became clear that this was a decision taken. No substantive assessment had been made as yet, but the principle itself made sense. The numbers would be looked at in future.

Ms Ajam added that it was useful to draw a distinction between aggregate expenditure ceilings, and ceilings on specific items like travel. A few years ago the FFC started a debate on whether there should be fiscal rules, but NT felt at that time that it was more appropriate to have flexibility. A debt rule would depend on revenue which depended on growth.

Mr Khumalo said that there was a need to understand the underlying factors to be able to assess the rule later. On input levels, the issues were a little more problematic. The Public Finance Management Act was not input-based, but output based. If input categories were to be introduced, for good reason, they could cut waste, but presently there was a disjuncture between the two approaches. These were new initiatives, but it was necessary to ensure that there was some alignment in the general approach.

The Chairperson noted that disasters were usually linked to flooding, which would have an effect on other provinces and on Alexander Bay and Port Nolloth. Coastal areas and sea disasters were another area on which there had to be engagement. This Committee had asked provincial treasuries to add disasters to their budget estimates in the future.

Budget and Expenditure Monitoring Forum (BEMF) submission
Ms Thokozile Madonko, Coordinator, Budget and Expenditure Monitoring Forum (BEMF) said that the BEMF represented a number of different individuals and organisations, with the goal of investigating and advocacy on budgetary issues. Ms Madonko noted that the present budget continued to be quite restrained. BEMF was suggesting that the “pie” could be larger. The BEMF came up with “the People’s Alternative Budget” each year, making suggestions as to some alternative political and policy choices which it believed that government could employ to expand the budget. The BEMF primarily looked at whether allocations of budget across the three spheres were in line with constitutional mandates, and whether the state was spending and generating funds to the maximum possible potential, to realise the values of justice and human rights and for all state departments to meet their human rights obligations. It looked at whether the funding was being used to prioritise reducing the current disparities and progressively realising certain rights, as set out in the Constitution.

The BEMF was concerned about some of the current allocations, which it believed would end up skewing grants, and leading to greater benefits being given to the metros and larger cities than to the rural municipalities.  The BEMF had accordingly recommended that Parliament should carefully consider the fiscal framework, Division of Revenue Bill (DORB) and the Appropriation Bill, cohesively, and that Parliament should then exercise the powers that it had to amend the bills and play its oversight role effectively.

In general, BEMF was concerned about the potential impact of the budget on the delivery of key services. It said that any budget must take into account the implications of changes on service delivery. The current macro economic and fiscal framework should ensure greater delivery.

The BEMF welcomed the focus on corruption and financial management and the strong stance taken to ensure that public officials did not engage in business with the State. It also welcomed the indication that the Auditor-General’s recommendations were to be implemented. BEMF called upon Parliament to ensure that the sanctions provided for in the Public Finance Management Act and Municipal Finance Management Act would be implemented to ensure that those found guilty of corruption were held accountable.

Ms Madonko said that she would take the Committee through some of the suggestions of the BEMF on the macro-economics, and on the provincial allocations, which were mostly focused on health, education and social services. She said that the BEMF firstly suggested that more money needed to be made available for service delivery. The question was where this money would be found. BEMF pointed out that there were many countries – including those in the developed world – that ran a budget deficit larger than South Africa’s, and it would not, in the view of BEMF, be disastrous if a larger budget deficit was planned. It believed that this could be achieved through greater domestic borrowing, at regulated interest rates. She referred Members to the detailed slides (see attached document)

Ms Madonko looked at health indicators, tabling a comparison of the 2013 Medium Term Budget Policy Statement against the Health Green Paper goals, and saying that this showed the need for a greater  expansionary budget. Needs on the ground had to be considered. There were, in the view of the BEMF, other options for stimulating growth and employment, as well as other options for eradicating the bucket system and rural – urban migration. The provincial fiscal framework had seen a downward revision, in comparison with the previous year, and these cuts would have an impact. The consolidated health budget would increase by only 1.5%. In some provinces – Eastern Cape in particular – there would actually be negative growth of 2.2%. This raised serious concerns about the ability of that province to deliver  on health obligations. There was very limited growth in education. Despite the stated focus on children, the social protection was limited, with slow expenditure, and it was pointed out that the increase overall would only be 1.8%, and the increase for social grants showed below-inflation percentage increases.

Ms Kerryn Rehse, Representative of BEMF and Shukumisa, explained that Shukumisa focused primarily on concerns around women, gender violence and sexual offences. Shukumisa had noted that in the period between 2010 and 2013, 100 jobs were lost, many organisations had lost their funding and were closed, and provision of ten services, primarily aimed at family resources, paralegal services and similar, were drastically reduced in the Department of Social Development (DSD). Where services had not been stopped, some organisations were aligned or rationalised, and their staff had to take on multiple roles. The DSD had a new policy on financial awards to service providers delivering services on behalf of the DSD, which was that only a percentage of salaries would be funded. There were minimal contributions to overheads. The salary scale used to determine the percentage of salary funding was unclear, with disparities across the provinces also,  and this meant unequal services were provided. The causes of the under-funding ranged from National Lottery funding being delayed or reduced, to external funders pulling out of South Africa, to late disbursements from the DSD, especially in Limpopo, where this provincial department had been placed under administration.  In 2012/13 the Minister of Finance had acknowledged that and made some additions to DSD, to the Victim Empowerment Programme, and some additional allocations to enable support and funding, which had been welcomed. This had followed the dispute between NAWONGO (a coalition of national welfare organisations) and the Free State provincial government, in 2010, over the costing of  Victim Empowerment Services. Despite commitment from NT, not all funds provided actually reached the service providers, and they also did not reflect the increases that had been calculated by the independent body KPMG, so that victim empowerment was underfunded. The budget also showed no specific focus on gender-based violence, which was the most common cause of depression and other problems seen in women.

Recommendations for the DSD from Shukumisa included the need to standardise funding across provinces, because otherwise beneficiaries received unequal treatment. The funding policy to NPOs had to be reviewed, and it was suggested that it was incorrect to start from the base-line of part-funding only. Consultation with NPOs was required to determine funding, and how money should be spent on the ground. Under-spending and use of funds should be monitored.

Dr Neviline Slingers, Manager: Donor Coordination, BEMF, and representative of South African National Aids Council (SANAC) talked about the fiscal space for addressing TB and HIV in South Africa. The annual costs of proper programmes to address both diseases and conditions were set out in graphs (see attached presentation slides 9 and 10).

She noted that there was multi-sectoral government funding, and in addition to that there was also funding from private and international donors. The government departments’ contribution would be R15.7 billion, rising to R19.8 billion, over the three year period, with most of this from the Department of Health (DOH), who funded national and provincial interventions. Provinces paid through the conditional grant and the Provincial Equitable Share. Funding from external partners would decrease over the next three years. She indicated that the PEPFAR (US government programme) would be withdrawing funding from South Africa , and there was also reduction of other agreements. There had been a decrease of R4.4 billion in 2012, to R3.7 billion in 2015, or a drop from 20% to 11% of funding available from the national response. This left a substantial gap, and the difference between what was needed and what would be given was expected to increase, and she said that a gap of R6 billion was already identified for 2015/16. South African citizens were now expected to live for longer, and any cuts to funding were likely to impact on this particular gain. She pointed out that there had been 370 000 individuals identified as newly infected in 2012. She noted that some of the drivers of the challenges were structural, but other human rights issues were not being fully addressed, and the costing given did not even include a full costing on some of the objectives.

Mr Daygan Eager, Rural Health Advocacy Project, and member of BEMF, briefly spoke to the DORB in the context of provision of rural health services, saying there was a need to change the allocations to rural areas. He tabled a map highlighting the divisions and the historical neglect of rural areas. Rural areas used less healthcare services, because of difficulties of distance and access to transport. 15% of poor households live more than a hour away from the closest clinic and 20% lived more than a hour from the closest hospital. There were “catastrophic” transport costs facing 15% of people who sought outpatient treatment, with perhaps 30% of the household income being spent for each visit to the outpatient services. In addition to geographical problems, there was lack of basic care, inadequate infrastructure, unreliable supply of medicines, lack of ambulance services and uneven distribution of health care professionals, with only 12% of medical professionals serving 38% of the population. He noted that the burden of disease was far higher in rural areas. The cost of rural healthcare was higher, because lower geographic density led to reduced economy of scale.

None of these factors appeared to have been properly taken into account in the funding mechanisms, since the equitable share formula averaged out funding by population numbers, without taking specific rural challenges into account. Rural provinces spent less per capita, on primary health care. There were some proxies for backlogs but they did not address rural factors specifically, nor did the equitable share formula address the division between district and local municipalities. The DOH focused on “under-serviced” rather than “rural” areas, and the lack of capacity to spend meant that there was no allocation of specific resources to bring some areas to the point where they were able to spend. A key recommendation in regard to health services was that resource allocations had to take rural areas into account, in addition to other measures that would consider the deprivation index, burden of disease, distance and service delivery platform costings, when drawing up norms and standards, and factoring all these into formulas at the provincial and national departments of health.

Ms Madonko noted that recommendations were also included from the Public Service Accountability Monitor, which illustrated that the DORB should consider the impact of all measures on the ground. At the moment, the DORB used a top-down process. There were concerns about the equitable share formula changes in the Eastern Cape and KwaZulu Natal, particularly in education, as a result of the census findings on declining school enrolments in these provinces. This impacted on the ability of municipalities, of whom many were rural municipalities, to be able to deliver services to an acceptable level. One of the key recommendations by this group was that provinces and municipalities had to be assisted to generate their own revenue. Whilst the grants could be used for areas of critical need, it was felt that there must be more focus on creation of sustainable job opportunities and all departments must be supported and encouraged to make the best use of their funding, which also went to proper planning.

The Studies in Poverty and Inequality Institute had given input on housing. Ms Madonko said that it had noted the real decreases in allocations (taking inflation into account) between 2009 and 2013. It was questioned whether there had been a proper evaluation of the provinces' ability to spend. If new grants were to be created, then it was necessary to factor in the capacity to deliver. This entity had noted massive under-delivery on housing and this raised the question about the nature of the spending. The capacity of provincial government also had to be considered. The USDG had not been used appropriately, as instead of being spent to enhance sustainable settlements, it had been spent on constructing bridges and roads. This suggested the need for a thorough review. The entity noted the RHIG proposals. Municipalities had failed to come up with proper responses to evictions and disaster, and it was concerned that there were no policies or subsidies for backyard dwellers, nor was the demand for public-funded rental housing, for those earning below R3 200, being met. This would require capital spending and an operating subsidy to ensure that there was proper management and maintenance of rental units.

Poor coordination across the spheres made it very difficult for communities to know whom they should approach, and they did not know which sphere was responsible for delivering services. There should be a functional monitoring system set up for verification of all housing projects (a recommendation that had been made by the FFC in 2013) and accessible data on financial and non financial performance indicators, national and provincial levels.

Finally, BEMF recommended that there was a need to review how national, provincial and local budgets were drawn. There had to be better gender-responsive planning and budgeting. Mechanisms had to be built in to allow a greater voice to the ordinary citizen, and real participation and engagement must be facilitated, from neighbourhood, to ward, to district, provincial and national levels. SALGA had raised points earlier about the role of the Integrated Development Planning, and many communities felt that there was no proper alignment with the planning at local level, which highlighted the need to support greater  transparency and access to budget information at provincial and local levels. It was suggested that a simple example might be to have a blackboard outside clinics, schools or offices, outlining what projects were being attended to, the budgets and who the contractors were.

Discussion
Mr De Beer asked whether this presentation was also being given to any provincial legislatures.

The Chairperson asked how often BEMF interacted with relevant departments. Some of the issues that it was raising were very important and he thought that there should be engagement with other departments and portfolio committees also. He asked whether BEMF participated in other Parliamentary public hearings. He thought that some of the inputs needed far more time for engagement, and wondered to what extent it had used other opportunities to engage with government.

Ms Madonko replied that BEMF did make presentations to provincial legislatures, and had recently done so in the Eastern Cape. The experience of those doing budget advocacy work was, however, that if they approached the provinces, they would invariably be referred back to the national level, because provinces said that they did not have enough money, which was why BEMF was raising the questions about the efficacy of the current division of revenue and the macro economic framework. BEMF did not currently do much work at local government.

She added that there had been engagement with stakeholders in the health and basic education sectors in Limpopo and other work had also been done in other provinces. BEMF tried to link its own work with that of other civil society groups focusing on the budget, to provide useful information and have an impact on the delivery of services. BEMF tried to provide opportunities for other organisations to engage in the budget process and to understand the broader questions around the delivery of services for NGOs supporting programmes. She would welcome an opportunity to speak to the Fifth Parliament, and have an open forum and a broader national discussion around budgeting in line with the constitution.

Mr D Joseph (DA, Western Cape) commented that the NGOs presenting were seen as an extension of service delivery to the people by the government. In light of this the comments about the need to review the funding was particularly relevant. He thought that the incoming committee would need to work on these matters in the new Parliament, and engagement with all stakeholders would be welcomed.

Ms Madonko agreed that NGOs were essentially providing an extension of services that were governments’ responsibility, which was why BMEF was so deeply concerned about cuts in funding for key services.

Mr B Mnguni (ANC, Free State) noted the comment on an increased budget deficit, and asked what BEMF might consider to be a reasonable deficit that the country could afford. He also referred to the comments on social grants. One political party had suggested a doubling of social grants, but he wondered if that could possibly be sustainable.

Ms Madonko said that a more detailed input had been given to a joint sitting of the finance committees, and she would be happy to repeat that to this Committee. The BEMF was suggesting that there were opportunities for increasing the deficit, by borrowing more from domestic funds, at regulated interest rates. If South Africa borrowed externally, it became more vulnerable to credit ratings by agencies, and investors that did not live in South Africa, and the impact of their speculation and rates demanded directly impacted upon South Africa's own ability to raise funds and deliver services. The “Alternative Budget Speech” of BEMF was suggesting that greater domestic borrowing and greater delivery of services by the state would lead to more growth. The Progressive Economic Network had also done work on this, and had come up with alternatives to what was contained in the current budget. There would be a number of reviews around the regulatory framework on interest rates, and the way in which borrowing was done, so it was difficult to suggest one “ideal” rate off the cuff, although BEMF was stressing that South Africa needed not to be at the mercy of international risk.

Ms Madonko said, in relation to the social grants, that some of the BEMF members had called for a basic income grant, similar to other proposals, but the question of sustainability set up the zero sum gain, that either there should not be a comprehensive social protection system, or that this should be left to the “trickle-down effect” of the (imaginary) market. She believed that social protection was needed for those who fell out of the economy – such as the very old and very young people - but it must also be recognised that South Africa had a huge burden and legacy to address and the current macro-economic policy trickle down had not happened. The assumptions on the market must be questioned, as no trickle-down had in fact happened within the current macro-economic policies. South Africa still faced the highest inequalities in the world, and one way to address that was to pump money to local economies within neighbourhoods. Providing a basic income grant to every citizen would inject funding into local neighbourhoods. Currently, most purchasing was done outside of the home neighbourhood.  BEMF argued that a more active state than currently proposed was needed, with reductions in provinces and local government.

Mr Mnguni noted the gaps already in need and donor funding, and said that this would increase as more sponsors withdrew. There had been an EU resolution that countries whom the EU used to regard as “developing” would not get any further funding as they were developing the ability to generate own revenues, and he asked how BEMF saw these developments, and whether South Africa would be able to cushion the blow, and how it might be able to call for sustained funding. He wondered if the South African Partnership Development Agency (SAPDA) funding could be redirected to provide assistance within South Africa rather than in the region.

Ms Madonko said that BEMF had not started to engage on overseas developments yet, but there were international campaigns that were trying to ensure that fair funding mechanisms were in place. South Africa was part of a global economy and it should be supporting regional partners. There would have to be a comprehensive assessment. BEMF believed that all overseas development aid needed to be specified on budgets, to enable the right recommendations around innovative financing, and it spoke to direct and indirect funding at an international level.

Dr Slingers added that SANAC had already started engaging with some of its funders, emphasising what the effect of their withdrawal of funding would be on the  needy, and it had managed to persuade the US Government not to pull back as fast as had originally been suggested. SANAC was assisting other government departments to cost their plans for implementing HIV and TB strategies, with participation at provincial and national levels. There were several stakeholders, but SANAC, representing both government and NGOs, was able to bring people together, provide frameworks for costing and ensure that there was not doubtful funding She added that there was a need to look carefully at the question of whether South Africa should stop supporting others. South Africa had to be aware of the effect of the HIV and TB epidemics and make real choices about how it was spending, including enhancing efficiency of the work.

Mr Mnguni noted the comment about the difference in funding for victims, particularly sexual violence matters, and wondered if the differences were incident driven.

Ms Rehse explained that the funding was not incident-based. The concern was that in one province, a shelter for victims of domestic violence might be fully funded, whereas in another, only a percentage of the operational costs would be funded, which resulted in differing levels of service to victims. The new funding model of DSD focused on activities and outcomes, rather than looking at the operational expenditure. Service organisations were being given higher targets in regard to numbers of people whom they must reach, but the funding did not match the increase in targets, so organisations had to spend more time chasing funding from elsewhere rather than actually delivering the services.

The Chairperson suggested, in conclusion, that BEMF should also consider perhaps engaging with national instead of provincial departments, for it might achieve more effective lobbying at that level. Money was allocated from the National Revenue Fund down to the provinces. In relation to the Money Bills, the Committee would welcome further engagement with a view to improving its oversight. He noted that Parliament had adopted the fiscal framework in the previous week, but it was possible to look at the next budget.

Committee minutes of 12 March
Mr Mashile suggested a technical correction.

Members agreed to the minutes, as amended.

Legacy Report: Adoption
The Chairperson suggested that the adoption of the Legacy Report be postponed to the following day.

The meeting was adjourned.