Division of Revenue Amendment Bill for 2015/16: public hearings

NCOP Appropriations

07 November 2014
Chairperson: Mr S Mohai (ANC, Free State)
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Meeting Summary

The South African Local Government Association (SALGA) commented on the Division of Revenue Bill (DoRB), saying it is in everyone’s interest within the context of the tight fiscal space to ensure that local government is properly resourced and capacitated to meet its developmental challenges. While not all items that SALGA would have wanted to see funded, were funded in the 2015/16 money Bill, it was satisfied that the equitable share remained constant and had been adjusted in line with the CPIX. There was a need to collectively define financial and economic viability of municipalities. It was proposed that small rural municipalities with limited tax bases should receive increased fiscal support . National Treasury and the Financial and Fiscal Commission (FFC) should investigate with SALGA a workable district revenue generation and funding model. The unintended fiscal gap created by the amended Property Rates Act, particularly the exclusion of state facilities from paying rates, needed to be resolved and so did the state’s indebtedness to municipalities.

The Development Bank of Southern Africa (DBSA) was asked to indicate any shortfalls to current infrastructure investment needs and any proposed alternative funding. It highlighted its role in supporting municipalities through initiatives such as strengthening the capacity of under-resourced municipalities in areas such as project planning, preparation and packaging as well as increasing focus on areas with the biggest unfunded gaps through project origination initiatives. DBSA continued to explore ways of increasing support to large cities through a number of options, including infrastructure grant pledging, injection of additional capital, crowding-in private investment through product innovation. Crowding-in the private sector would enable DBSA to free up capital for reinvestment in infrastructure projects.

The Municipal Infrastructure Support Agent (MISA) indicated its mandate as the provision of technical capacity support and assistance of municipalities to build their internal capacity for improved delivery and management of infrastructure and service provision. Its programmes focused on supporting low and medium capacity municipalities that were struggling with the development and maintenance of infrastructure and service provision. There were currently 121 municipalities in receipt of MISA support nationally and the number of technical resource persons numbered 78. MISA was in the process of aligning its support programmes and approach to COGTA's Back-to-Basics model that was currently being implemented in all provinces. Part of this realignment included the integration of MISA’s capacity building and training sub-programmes with other capacity building initiatives under the Back-to-Basics model.

Members emphasised the need for mutli-year planning in the municipalities. The lack of planning affects the programmes at grassroots in the municipalities. Members asked SALGA to specify the programmes it would have wanted to see funded but which were not and if high impact projects added value in the municipalities. Members observed that there was need for more collaboration among SALGA, DBSA and MISA in supporting municipalities.

Meeting report

Comments by the South African Local Government Association (SALGA)
Mr Subesh Pillay, Councilor, said SALGA participated in the Budget Forum convened by the Minister of Finance prior to the presentation of the DoRB and is cognizant of the precarious state of the country’s finances, its debt burden and the competing needs for the nation’s limited resources. However, it is in everyone’s interest within the context of the tight fiscal space to ensure that local government is properly resourced and capacitated to meet its developmental challenges. While not all issues SALGA would have wanted to see funded were funded in the 2015/16 money Bill, it is satisfied that the equitable share remains constant and has been adjusted in line with the CPIX.

There is need to collectively define financial and economic viability of municipalities. SALGA raised an issue at the Budget Forum about ensuring a diverse range of revenue generating instruments for metros and secondary cities. It is proposed that small rural municipalities with limited tax bases should receive increased fiscal support and there is need for the National Treasury (NT) and the Financial and Fiscal Commission (FFC) to investigate with SALGA a workable district revenue generation and funding model. The unintended fiscal gap created arising out of the amended Property Rates Act, particularly the exclusion of State facilities from paying rates, needs to be resolved and so does the State’s indebtedness to municipalities. SALGA will continue engaging with Treasury and the Department of Cooperative Governance (DCoG) on the matter of unfunded and underfunded mandates as was agreed upon at the Budget Forum.

SALGA noted its efforts to work with Eskom to resolve municipal debt to Eskom. It will investigate a similar arrangement with the Water Boards. It is upscaling its work in investigating the billing systems of municipalities to finally crack this perennial problem.

Discussion
The Chairperson stated that the submission confirmed that the financial situation and economic viability of municipalities was a critical issue on the Committee’s agenda. Was the formula for increased fiscal support not revised so as to include basic services in the municipalities? What is the extent of inter-governmental debt referred to on page 5 of the submission and its impact on municipalities’ ability to render basic services?

Mr Pillay responded that the intergovernmental debt was about R4 billion but there was contestation as to whether or not this figure was correct. There is need to work out modalities to ensure the payments are done upfront because the Department of Public Works pays in cycles, resulting in the debt being outstanding always. The equitable sharing formula was revised to include an institutional component which relates to institutional capacity to deliver services. In some municipalities, it goes beyond an institution’s ability to collect and has more to do with the inability to have a revenue base. The assumption is that there is a revenue base from which to collect. The point of departure is that some municipalities hardly have a sustainable revenue base over and above the continued support of institutional capacity.

Mr Simphiwe Dzengwe, Executive Director: Municipal Finance at SALGA, added that a joint working team between SALGA and the Department of Public Works had been established to look into all previous debt owed by the state to various municipalities.

Mr C De Beer (ANC, Northern Cape) said in the Medium Term Budget Policy Statement (MTBPS), the Minister reflected the issue of multi-year planning not only by national departments but specific municipalities. This issue was raised before with the SALGA leadership. SALGA must, in its training workshops or programmes for municipalities drill multi-year planning into municipality officials because it will be apparent from the division of revenue what municipalities will receive over the three year planning cycle. The municipalities must do the planning because only nine municipalities received roll-overs according to the presentation by the Treasury. This must change and it can only change through the three-year planning cycle. The lack of planning affects the programmes at grassroots in the municipalities. SALGA should provide more details about the proposal for increased local government funding at page 8 of their comments in order for the Committee to take them into account when preparing its report. It appears that Municipal Public Accounts Committees (MPACs) are frustrated in the performance of their mandate and a way forward needs to be found in terms of legislation to help them perform their functions.

Mr Pillay said the point made about multi-year planning is fair. Local government currently operates on 12 month cycles as a result of which there are many requests for roll-overs. SALGA is working on refining the planning ability of local government. However, the challenge is that commitments can only be made in respect of what has been physically budgeted for a year and the commitments are indicative for the next year.

Mr Dzengwe stated that SALGA had developed comprehensive instruments for the training of oversight committees such as the MPACs and audit committees.

Ms T Motara (ANC, Gauteng) stated that it was good that SALGA had been part of the budget process from the start and so was not making pleas after the process had long gone. Is it ever possible to quantify unfunded and underfunded mandates considering that this issue always comes up? How is it that there are unspent monies from municipalities and yet the same municipalities continually have unfunded and underfunded mandates? SALGA should specify the items it would have wanted to see funded but which have not been funded. Is the Department of Public Works the only state institution that owes municipalities money considering that it is the only one mentioned on page 5 of the submission?

Mr Pillay responded that the Department of Public Works was specifically mentioned in the submission because the debt involved is collected through that department. Quantification of funded and unfunded mandates has been a challenge but SALGA has agreed with Treasury and FFC to do some more work on defining these. Part of the problem is that some of the services by municipalities are executed on behalf of the national or provincial governments but there is no agreed national norm on how the services are to be provided. There is need for agreement on the minimum norms for service provision. The point on unspent municipal funds is fair in that this phenomenon continues in the municipalities. There is a need to refine the planning cycle so as to optimize spending.

Mr Dzengwe said SALGA would have wanted to see funded certain reform programmes that had been proposed for local government. These included the Standard Charts of Accounts (SCOA), some in the form of Spatial Planning and Land Use Management Act (SPLUMA), like GRAP 17 and other reforms that came through Treasury and DCoG. SALGA had noted the results of the pilot programmes. It was engaging Treasury as implementation of these reforms would entail procurement of appropriate hardware and other requirements so that they are not found wanting by the Auditor-General due to funding support they did not get upfront. Treasury indicated that some of the municipalities could meet the additional funding requirements from their budgets but SALGA felt that based on experience, additional funding by way of special grants, was necessary for some municipalities despite the results from the pilot programmes. SALGA and FFC were mandated to do some quick calculations for the funding requirements for demarcation and, based on the Tshwane experience and those municipalities affected by demarcation, a projection of R237 million was arrived at. The DoRB has provided an amount of R139 million, meaning there is a shortfall. However, SALGA and Treasury agreed on a way to manage the shortfall. It was agreed in the Budget Forum that the definition of unfunded mandate is important.

Mr L Gaehler (UDM, Eastern Cape) said that most of the funding for municipalities that cannot raise revenue goes to payment of salaries. Has SALGA considered shared services as a way of minimizing the cost of employees?

Mr Pillay said on aggregate the funding that goes to salaries accounts for about 28 – 32% of municipality expenditure and Treasury could confirm that. However, municipalities are labour intensive institutions because actual people are needed to deliver basic services and so there will be exceptions where the 32% threshold for salaries is breached. The concept of lean and thin government may not be apt for municipalities due to their labour intensive nature.

Development Bank of Southern Africa (DBSA) submission
Mr Tshokolo Nchocho, Group Executive: South Africa at DBSA, said DBSA supports municipalities through, among other initiatives, strengthening the capacity of under-resourced municipalities in areas such as project planning, preparation and packaging; increasing focus on areas with the biggest unfunded gap through project origination initiatives; providing affordable funding through development subsidies to secondary municipalities and under-resourced municipalities; and integrating financing and non-financing support activities to achieve overall development.

Some of the development challenges and strategic issues identified are rapid urbanization, aging infrastructure leading to water and electricity losses, growing indigent population, economic growth constraints by infrastructure and conservative fiscal policy. There are a number of new business development oriented strategic initiatives that could be used to meet the funding gaps of municipalities, including public-public partnerships, private developer financing, public sector contract, build-lease-transfer, project preparation assistance, maintaining price competitiveness and using districts municipalities as vehicles for reaching M2/M3 communities. DBSA continues to explore ways of increasing support to large cities. Some of these options include infrastructure grant pledging, injection of additional capital, crowding-in private investment through product innovation. Crowding-in via the private sector will enable DBSA to free up capital for reinvestment in infrastructure projects.

Discussion
Ms Motara observed that there was a need for municipalities, especially those without a revenue base, to reduce duplication and embrace the sharing of technical capacity.

Mr Gaehler noted that there was a shortage of technical skills in the country and proposed that SALGA should consider sitting with DBSA to discuss ways of addressing this shortage through innovations such as shared services. If a municipality needs assistance and they approach DBSA for help, what assistance, if any, can DBSA give?

Mr Nchocho responded that DBSA can help municipalities that approach for assistance. However, the limitation is human resources in that DBSA has only about 500 employees. DBSA’s strategy has been to deploy expertise in areas where a municipality is applying for funding from DBSA.

The Chairperson said the submission was spot on. What is the difference between capacitated and under-resourced metros? Nelson Mandela and Mangaung are classified as under-resourced metros but the former is located in an area with an industrial base while the latter seems to be associated more with services. What makes the two metros under-resourced notwithstanding the differences highlighted? There are high capital projects coordinated by the national government which are implemented by the municipalities. Do the high impact capital projects add value in the municipalities?

Mr Nchocho answered that the classification of the metros was determined at two levels. Firstly, all of them over the past couple of years have been grappling with financial management issues.  Their audited accounts are generally disclaimed. At the end of the day the finances of an entity are the ultimate reflection of its capacity. Secondly, and especially for Buffalo City, it was observed that the long-term integrated planning was not adequate. High impact projects have the potential to work if implemented according to intended objectives. It often happens that major projects are planned well but their execution does not accord with the original objectives. It is necessary to subject all major projects to a strict viability or sustainability test so that deficiencies are brought to bear and monies are not wasted.

Mr Mohan Vivekanandan, Group Executive: Strategy, added in respect of high impact projects that DBSA was moving away from its traditional approach to being more proactive in supporting such projects.

Municipal Infrastructure Support Agent (MISA) submission
Mr Shephard Gadzikwa, Acting Head: Municipal and Sectoral Technical Support at MISA, said MISA was mandated to provide technical capacity support and assist municipalities to build their internal capacity for improved delivery and management of infrastructure and service provision. Its programmes focus mainly on supporting low and medium capacity municipalities that struggle with the development and maintenance of infrastructure and service provision. There are currently 121 municipalities in receipt of MISA support nationally and the number of technical resource persons involved is 78.

As part of improving on its readiness to address felt needs of communities, MISA has adopted a method of providing support through District Teams as well as resident engineers where required. This support is made available throughout the project life cycle.

The ability of municipalities to plan, implement and maintain infrastructure to ensure sustainable provision of services depends largely on the level of skilled personnel in the municipalities. MISA conducts technical training and has this financial year trained 452 technical municipal officials in various short courses. In addition, MISA offers bursary support to deserving university and TVET students in electrical and civil engineering, Town and Regional Planning and Geographical Information System (GIS) every year. The idea is to replace and replenish the scarce and critical skills in local government.

MISA is in the process of aligning its support programmes and approach to the back-to-basics model currently being implemented in all provinces. Part of this realignment includes the integration of MISA’s capacity building and training sub-programmes with other capacity building initiatives under the said model.

Discussion
Mr Gaehler said government had a lot of good entities which worked in silos. It is necessary for these entities to work in collaboration. Practical training for technical staff was very important in light of the shortage of technical skills in the country.

Mr Gadzikwa answered that MISA does, in a way, work with DBSA and SALGA. The three entities will work at ways to collaborate with other stakeholders

Mr Nchocho said collaboration among the entities concerned was happening in practice but not to the level it should be. For example, DBSA was funding a water sanitation programme to the tune of about R600 million and MISA was helping with implementation thereof. There is need for more of such collaboration. The provinces should work better with the municipalities in those provinces. DBSA would engage more with SALGA on policy issues.

Mr De Beer stated that there was a need to be progressive, and he noted that the Minister of CoGTA and his team were rolling out the Back-to-Basics programme of the government that would have an enormous impact. The emphasis on multi-year planning is informed by page 177 of the DoRA where it is stated that the receiving officers must ensure the appropriate project implementation planning prior to the year of implementation. SALGA, CoGTA and Treasury should, in a coordinated way, conduct the relevant training for multi-year planning intensively. There was a programme where MISA, DBSA and Treasury employees were deployed to municipalities to assist the financial units. The programme ended in March 2014, resulting in a vacuum. The programme must go on and discussions to this end must be expedited. What value do consultants add to municipalities by directing the people who work in the municipalities?

Mr Gadzikwa answered that consultants add value with regard to finance, which MISA is not involved in. However, the point on the issue is noted. Consultants need to be involved in the implementation process as opposed to just observing from a distance. MISA asks consultants it engages for deliverables for each outcome in the form, for example, of a master plan failing which they do not get paid. Consultants must be adaptive because municipalities differ from one area to another and there can be no one-size-fits-all solution to their challenges.

Mr Nchocho noted the emphasis on multi-year planning and said there was need for the entities concerned to look at how this could be enhanced. The money allocated must be preceded by planning.

The Chairperson said planning was key. It takes longer than planned to implement some of the projects. It would be good to see the realisation of the Minister’s indication that there would be a shift in the way work was done in order to assure quality work continued at a lower cost. The issue of integration of programmes is a challenge mainly because it is an issue of there being no broad base of relevant skills in the country.

Mr Gadzikwa acknowledged the issues raised on integration and stated that it must be explored further. There is need to respond to the issue of delayed implementation of projects around planning.

Mr Dzengwe agreed with the suggestion that there was need for SALGA to work more closely with DBSA and MISA. It would be a good idea to investigate the notion of district-shared services. One of the challenges faced by municipalities is finding a way of structuring financing deals for projects. There is need to develop creative models of funding municipalities. The back-to-basics model requires the entities concerned to join forces and find ways of complementing each other’s roles. There is scope for further collaboration among the institutions.

The Chairperson said section 6(1) of the Money Bills Amendment Procedure and Related Matters Act, No 9 of 2009 requires the Minister of Finance to submit to Parliament, at least three months prior to presentation of the National Budget, a medium term budget policy statement which the Minister did. The Act also requires the Committee to conduct public hearings on the revised fiscal framework for the current financial year and the framework proposed for the next three years. In this regard, the contributions of stakeholders are valued by the Committee and the issues raised will assist the Committee in compiling its report to the House. Individual submissions have been received by the Committee and would also be taken into account when preparing the report.

The meeting was adjourned.

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