2015 Division of Revenue Bill: comments by South African Local Government Association

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Meeting Summary

The South African Local Government Association (SALGA) made a presentation to the Committee with comments on the Division of Revenue Bill (DORB) in great detail, covering a number of issues that drew mixed reviews from Committee Members. SALGA several times highlighted its concern that the equitable share distribution had allocated an inadequate amount (under 10%) to local government. The presenters further discussed the challenges facing local government in the provision of basic services such as water and sanitation, and electricity. SALGA additionally addressed the difficulties faced by local government in collecting and growing their own revenue in the form of rates, as well as the means by which they sought to expand this revenue base, and so lessen their reliance on national funding. SALGA highlighted the measures taken by local government to address these challenges and appealed to the Committee for further assistance in the matter, most specifically in the form of legislative intervention.

The Committee questioned whether SALGA was visible enough in local municipalities and wondered whether it was actually doing enough to assist muncipalities in facing the challenges. Different Members had differing perspectives on the amounts allocated to local government; some felt that it was indeed very little, given that service delivery to the people happened at this level, but others pointed out that municipalities were not even managing to spend, and were returning portions of grants unspent, and therefore questioned their capacity to spend, and, more particularly, whether the spending being done was proper and was achieving value. Some said that SALGA was speaking too many theories and not taking sufficient action. Many of the Committee Members sympathised to a degree with the pressures placed on local government to meet the demands of the people with a minimal resource base, but still sought more specific justification for the proposed increases in financial support to local government, with many asserting that local government must address their many inefficiencies and do more to collect own revenue, and citing instances from their own constituencies where this was not happening. They also cited examples of municipalities failing to pay water boards and Eskom. The Committee stressed the need for local government to improve their rate collection methods and to move away from a culture of planning to a culture of implementation.

Other issues addressed included the housing grants, unfunded mandates, the question of qualifications of Chief Financial Officers and Municipal Managers, training and interventions by SALGA, whether encouraging municipalities to borrow more would add to or diminish the problems they faced, and sustainability and real costs of demarcation and mergers. The Committee stressed that it would carefully assess all the information provided and analyse the questions and responses not only from SALGA but other bodies also.

National Treasury added to the discourse, clarifying the role played by Treasury in the matters and issues raised and discussed by SALGA. National Treasury also contended that local government must address its structural inadequacies and other inefficiencies before it could truly claim to be under-resourced. It supported the call by the Committee for SALGA to address the problems municipalities faced in collecting rates, and outlined the forums that were discussing the issues, as well as clarifying comments from the Auditor-General and the media reports on the qualifications of municipal staff.

Meeting report

Election of Acting Chairperson
Ms S Shope-Sithole (ANC) was elected as Acting Chairperson. She tendered the apologies of Mr S Mashatile (ANC).

She commented on the importance of the South African Local Government Association (SALGA) to governance in South Africa, and their contribution to the Committee's work.

2015 Division of Revenue Bill: South African Local Government Association submission
Mr Subesh Pillay, Chairperson: National Working Group on Finance, South African Local Government Association, thanked the Committee for the opportunity to present. He said the Association (SALGA)  did not intend to repeat what was said to National Treasury (NT). As an independent voice, SALGA looked forward to addressing some of the key issues raised in the discussion of the 2015/16 institutional revenue discussions.

SALGA acknowledged that the country was facing difficult economic times and must view the budget in that context. SALGA’s collective resolve and ability to deal with matters would, he hoped, help to mitigate the desperation that local stake holders sometimes faced, especially municipalities forced to deal with service protests in local areas. The budget was not only an instrument to address medium to long term development trajectories but also an instrument to address the pressing challenges that local government experienced on a daily basis.

SALGA would also like to indicate that it had had extensive engagement with National Treasury, the Finance and Fiscal Commission, Department of Cooperative Governance and Traditional Affairs (COGTA) and other stakeholders with respect to the fiscal state of the country and the allocations that had been proposed. These engagements had mainly covered the issue of local government funding and that was what he would concentrate on in this presentation, giving comments on the vertical division of revenue, the equitable share arrangements and support for local government through the conditional grant system.

Most pertinently, SALGA participated in the Budget Forum convened by the Minister of Finance,  in September 2014. Most of the issues relating to the Division of Revenue Bill were tabled and discussed. Whilst cognisant of the precarious nature of the financial state of the country, the debt the country faces and the competing needs for limited resources, SALGA was nonetheless also aware and mindful of the need to leverage the limited resources strategically to drive the priority areas of the national development plan and to secure the fundamentals that would put the country on a solid trajectory of growth, addressing the triple challenges of poverty, unemployment and inequality. In this context SALGA contended that it was in everyone’s interest to ensure that local government was properly resourced and capacitated to meet the development challenges. Gone were the days of an adversarial relationship between organised local government and the rest of government. All spheres of government had a joint responsibility to find solutions to the challenges they had to address.

SALGA wanted to highlight some pertinent matters that would demonstrate its positive take on the Division of Revenue Bill and the funding and resourcing of local government.

SALGA noted that there was no baseline reduction in the equitable share to local government, though the new formula was still being implemented over the medium term expenditure framework. This linked primarily to issues around the updating of figures and the determination of contributions. The work on the review of the allocation of shares must continue, to ensure that local government gets a larger portion of the national fiscus than at present. The current allocation to local government was 9%, which fell far short of enabling local government to meet its ever growing challenges. It was often pointed out that local government had the ability to raise taxes to generate its own resources and so should not be primarily dependant on the national fiscus. He felt it important that SALGA and the Committee should continue to debate and discuss how to "share the pie" of the national fiscus.

The inflation adjustments fell short of the increases faced in implementing some of the administered services, such as water and electricity. Given the spatial distortions in the economy the equitable share was the main source in most municipalities to drive developmental imperatives and meet the services obligations. Local government should not be restrained in its capacity or legal ability to raise taxes, but there were bigger questions about the historic construct and spatial form of those cities who were unable to levy taxes, which impeded their ability to collect revenue. This in turn undermined their ability to discharge their constitutional mandate to provide services to local communities. A more holistic manner of allocation should be addressed to ensure that local government was resourced and enabled.

The proposed tariff increases that would affect the 2015/16 fiscal year included 13% for energy (on which announcements had already been made), 10% increase for water, 9% for sanitation, and 9% for refuse collection. There was 10% increase to the cost of providing these services  

Mr M Figg (DA) interrupted to point out to the Chairperson that the slides displayed were missing from the pack handed to Members.

Mr S Pillay apologised, saying he only included the slides late last night and that he would make the missing slides available to the Committee.

Ms Shope-Sithole noted his apology, but reminded SALGA that this was a very important exercise and Members needed to be fully equipped to tackle the issues and do follow-up. She asked if the missing slides had been mailed to the Committee, in which case the staff would be able to make them available.

Mr S Pillay said that there were updated pages prepared which, if acceptable, would be distributed at the end of the meeting.

Mr Pillay continued that SALGA had conducted detailed surveys on the actual cost of providing electricity, water and sanitation against the allocation from the equitable share formula. With respect to electricity, the shortfall in 2014 was R3.56 billion or 62.2% of the equitable share, which was costed at R 9.3 billion. The shortfall for water for the 2014 fiscal period was calculated at R9.4 billion rand, or 7.3 % of the equitable share location. The allocation for sanitation was R951 million rand but the actual costs were an extra 13% at R6.4 million. These matters, as indicated earlier, continue to be discussed with the NT and FFC, and this was part of the ongoing work of reviewing the equitable share formula.

SALGA welcomed the support of the budget committees through the implementation of the following measures:
- the modification of the infrastructure grant by reducing the number of grants
- introducing more flexible grant conditions
- an increase in the certainty of transfers over a longer period of time, enabling better planning and hopefully facilitating an increase in and higher efficacy of spending  of these grants.

SALGA was focusing on the Neighbourhood Development Partnership Programme, which was dealing with the development of economic hubs in large urban towns. This was an important issue because the continued drain that the patterns of migration into the big urban centres was putting on cities required them to think differently about how they wanted to fund the infrastructure requirements in those cities. They could not just rely on grants and subsidies or increase the tax burden on residents. They needed to think about how to grow the tax base, so that more people were brought into the tax net, thereby reducing the burden on the individual. It was important that their funding instruments helped them to grow their economies.

SALGA was also focusing on the reform of the system of development charges to improve fairness and transparency and to reduce delays in infrastructure provision for private land developments. This was important because most cities were able to attract and facilitate, capitalise and implement big private sector developments, and thus increase the tax base referred to earlier. More people would be paying for rates and services. Also to be considered was the multiplied effect of these developments on the local economies, reviewing the sustainability of existing own-revenue sources for metro municipalities, the expanding opportunities for private investment in municipal infrastructure through the Development Bank of South Africa (DBSA) increasing its origination of longer term loans to fund this infrastructure, and project preparation facilities provided in partnership with the DBSA.

SALGA noted that there were other points that caused it more concern. Mr Pillay repeated the concern that only 10% of the national fiscus was put to local government mandates. The unresolved issue of the Human Settlements Development Grant (HSDG) remained a concern. He explained that this related to the phase 3 accreditation of municipalities, meaning the grant funding from the national fiscus would go via provinces to municipalities. Discussions last year revealed that those municipalities that qualified for level 3 accreditation would henceforth receive the grant directly. However, this had been stalled and  local government still received the grant from provinces. The challenge was then where these housing developments took place because often there was a disjuncture between where the province funded housing developments and what the spatial priorities of municipalities were. Sometimes provinces continued to fund housing projects outside the areas of compaction and intensification within the municipalities, which in itself undermined the attempt to spatially reconstruct cities.

SALGA was also concerned about the state of households and private indebtedness, and likewise the  issue of indebtedness of municipalities, Eskom and the Water Boards required urgent attention and resolution by all. The State debt continued to rise, and the debt that national and provincial departments and agencies owed to municipalities was also on an upward curve.

As SALGA continued to articulate the need for an increase in national funding, it was also cognisant of the need to ensure better management of the resources, and it was aware that the system was porous. Financial management of municipalities left much to be desired. The Auditor-General's Consolidated Report on the state of municipal finances was telling. SALGA was aware that there was also much work that local government, municipalities and staff had to do to ensure that they stabilised collection levels, went back to the basics, and were able to tar roads and ensure street and traffic lights worked, to create an incentive for communities to pay for the services they received. SALGA would continue to invest more in training, performance and capacitation of municipal oversight committees, Municipal Public Accounts Committees (MPACS), audit committees, internal audit functions within municipalities, would encourage municipalities to strive for value for money and the implementation of cost saving primarily guided by Treasury recommendations.

SALGA agreed on the arrangement of two Budget Forums, one specifically focused on local government. The Budget Forums were part of the process of the compilation of the national budget. SALGA intended to use them fully to enhance engagement, scoping of issues and the collective resolution of matters that found expression in the Division of Revenue Bill.

Mr Pillay noted that in regard to direct and indirect funds to cities, National Treasury would not be funding the transformation of city transport logistics but would rather assist the cities to deploy their own resources to do so. This went with the merging of two transport grants, the Public Transport Operating Grant and the Public Transport Infrastructure Grant. This created a positive possibility of moving funds between these two grants. SALGA would endeavour to ensure a more sustainable response, in terms of spending, to these transport interventions.

National Treasury and the DBSA had undertaken to assist cities to expand their borrowing instruments and assist in making better use of their own resources. SALGA needed to discuss with Parliament how to increase the borrowing capacity of municipalities, and this was one of the ways. It would create certainty in what they collected, how to securitise income, and would raise confidence in investors and lenders on the likelihood of repayment. Unlike National Government, who could institute legislation to ensure it was paid what was due (and South African Revenue Services could ultimately retrieve its debts from individuals directly), Local Government could not do so. Municipalities had their own credit control policies, and SALGA's research had shown that often debt owed to municipalities was treated only fourth or fifth in priority. People tended to pay their bonds, school fees and store accounts, but would only pay municipal accounts last. There was a need to think about how municipalities might secure their debts through legislation. Municipalities needed to be able to tap into people’s salaries at source, similar to SARS' ability to deduct taxes at source. This again would enhance the willingness of lenders to invest in local government because they would be certain about the returns. This complemented the call that cities should make bigger contributions to their own capital budgets. If they could borrow more they could invest more in their own capital programmes, and so grow their tax base.

SALGA noted that municipalities would, in future, be permitted to use a portion of the Municipal Infrastructure Grant (MIG) for refurbishment, on condition that they maintained the standard of the assets over a period of time.

SALGA noted that there had been strides in reforming the grant system, and it would continue to make inputs into those areas that had not been finalised yet. It welcomed the allocation of the Demarcation Transition Grant of R139 million to support those municipalities affected by demarcation, particularly in KwaZulu Natal (KZN) and Gauteng. This must be put in context. In 2011 the Tshwane effects of the merger cost Tshwane R1.2 billion rand, which could have been used to service its original constituency prior to 2011,. This had not been funded by the national fiscus. As the country continued to deal with issues of demarcations and mergers, there was a need to recognise the fiscal impact it had on the receiving municipalities. SALGA would continue to engage National Treasury and the DBSA to ensure that support of these cities was well managed and coordinated, and to discuss unresolved issues of the housing and development plan in the next budget forum which would specifically address Local Government issues. SALGA would continue to work on the issues of under and unfunded mandates, billing systems, review of funding instruments for specific municipalities and municipal debt. It continued to work with National Treasury, Municipal Infrastructure Support Agency (MISA) and other entities to bring about the requisite capacity in municipalities to ensure that grants were spent correctly and that they could stretch the rand as far as possible to maximise the output and impact of their funding.

Municipal revenues would continue to be under pressure in 2014/15. Bearing in mind the review of growth projection, the downward review of revenue to the national fiscus would find expression at the household level, which would in turn directly impact on municipalities. Municipal revenue thus must be strengthened, and the continued involvement of organised local government budget processes was acknowledged. SALGA would continue to participate in the review of the local government fiscal framework, amongst others the local government infrastructure grant review process, the review of metropolitan municipalities own resources, its work on the costing of the provision of basic services compared to the equitable share calculation, the local government debt issues, the funding of the district model arrangements within local government, and the issues around procurement reform.

SALGA planned to introduce visibility requirements in terms of the Urban Settlement Development Plan, it had become one of the eligibility requirements for the Integrated City Development Grant, which was introduced in the 2014/15 fiscal cycle. The Built Environment Performance Plan (BEPP) was a strategic overview of the built environments that would be used to enhance inter-governmental efforts aimed at improving the performance of municipal built environments. It would complement existing municipal plans, and not replace them. It was placed between the Metropolitan Spatial Development Frameworks (MSDF) and the Integrated Development Plans (IDPs), with a specific focus on the social and economic infrastructure components of the built environment. The core objective of the BEPP was to provide a brief strategic document, and enhance planning, to provide an overview of the built environment, programmes, targets, areas of focus and the basis for infrastructure grant submissions. SALGA's response to all of his was that the National Treasury, through the City Support Programme, remained the key driver of the BEPP process. SALGA had been involved in the conceptualisation of the BEPP through National Treasury and it had visited participating municipalities, together with National Treasury, to ascertain the impact. The Department of Human Settlements (DHS) was to drive those plans ideally. SALGA welcomed the programme but noted that there was still quite some work to be done to implement and coordinate.

Mr Pillay concluded that SALGA had noted and welcomed the Division of Revenue Bill 2015/16 and appreciated the ongoing work to find solutions to local government funding and capacity building, whilst noting the fiscal constraints on the budget and the implications of these restraints for local government. SALGA would continue to engage with others on fiscal and funding gaps experienced by municipalities and ensure that the developmental role and mandate of local government was not compromised.


Mr A McLaughlin (DA) commented that the Constitution provided for three spheres of government, which were packed with all sorts of other departments and institutions designed to aid those three in performing their functions. He commented that this resulted in wastage of money. People were paid to do what other people had also been paid to do, exacerbated when one was not able to do the job properly. This was apparent across the board. With all due respect to SALGA, he said that he did not think SALGA had brought much in terms of assisting with service delivery, which should be the bottom line. It should be looking at how local government brings services to the people. He agreed that the , 9% of national budget allocated to local government was far too low; the average person would interface with government at local level, which was charged with servicing the people, providing electricity, water, sanitation, roads and general infrastructure. National and provincial governments  liked to delegate this role to municipalities and let these municipalities face the wrath of the people when the services were not provided, without actually helping them with the tools to delivery. He suggested that, 20 years after democracy, SALGA should be exerting far more pressure on the fiscus and National Treasury to increase the amount allocated to municipalities, particularly since they could not or would not collect the money that was due to them. The municipalities also did not pay their own bills, which had knock-on effects on their own service providers who then could not address their costs - such as Eskom, which would be in a far better space if municipalities paid their debts to it.

Mr McLaughlin thus urged SALGA to put far more pressure on National Treasury and the fiscus to put more money into the municipalities, saying that until they were better able to deal with their financial load, the problems would never be solved.

Mr McLaughlin referred to slide 5, and asked for clarity on the statement that additions made in the 2013 budget would mean growth in the LGES in 2015/16. He liked the sentiment reflected on slide 6, that modifying the infrastructure grant system by reducing the number of grants, introducing more flexible grant conditions and increasing the certainty of transfers over a longer period of time would help, but pointed out that this could be a duplication of the system and instead, municipalities must fix what they had. It was frustrating to suggest that municipalities should add on an additional system to get their systems to work.

Mr McLaughlin commented about ‘reviewing the sustainability of existing own-revenue sources for metro-municipalities’ and said he felt this applied to all municipalities, not just the metros, as all municipalities had problems and areas where people could not or did not pay for rates and services, even if they were not registered as indigent, yet little was done to collect the large body of debt. No steps were taken, and there was no plan of action to collect, although the Municipal Finance Management Act (MMFA) made it very clear that the duty was on the municipalities to collect outstanding debt. He had never received satisfactory answers on this point over many years, and debt continued to grow. In his own constitutency of Emfuleni, the population of Sebokeng owed Emfuleni Municipality R2.2 billion  in unpaid rates and taxes. This was clearly unsustainable; no municipality could perform if it did not collect its revenue.

Mr McLaughlin did not agree with the plan to expand opportunities for private investment in municipal infrastructure, through the DBSA increasing its origination of longer term loans, because he felt this would compound the problem by encouraging municipalities to attempt to fix their problems by borrowing more and so increase their debt levels. A similar problem applied at national level with a debt level of 41% - and if the guarantees issued to various state owned enterprises were to be cashed in, this debt level would rise to 82% which was unsustainable. It was impossible to borrow a way out of trouble as it would only create more problems.

Mr McLaughlin was pleased that SALGA had highlighted that it was not happy with local government being allocated less than 10% of the national fiscus, and suggested that it should emphasise this evey harder. Part of the problem was the huge overlap of mandates; for example the provision of water and sanitation was a mandate for Department of Human Settlements, Water and Sanitation and SALGA. He acknowledged that there were inter-governmental meetings to establish who was responsible for what, but believed that water and sanitation was one function, and all the pressure was placed at local government level, which had the least resources to tackle the issue. The Committee had been told previously that MISA had employed 50 engineers to go into the municipalities and help them deal with their problems, and he believed this was a repetition of the same problem, again duplicating efforts. He suggested the need to decrease, not increase, numbers of personnel, but get more effective, efficient, value-add services for the money spent. In 2015/16 he would like to see SALGA invest more in monitoring the performance and capacitation of municipal oversight structures, such as MPACs, and asked what success there had been to date with these institutions, and what consequences and follow up was done if they discovered problems. He asked if these institutions were effective and worth the money spent on them.

Mr McLaughlin referred the delegation to slide 11, highlighting the statement that SALGA welcomed the allocation of the Demarcation Transit Grant of R139 million. This differed from what had been published in the Appropriation Bill, and he wondered if this was a mistake. He had reservations about the BEPP because he foresaw it being yet another planning body, whereas South Africa needed implementers.

Mr A Shaik-Emam (NFP) emphasised the point of his colleague around the BEPPS and the integrated city development plan, and agreed that it did appear to be a duplication. From his experience, he felt that the MPACs were very limited in what they could do to ensure compliance. Often, the municipal managers would undermine the MPACs and they would reach a dead end when trying to investigate. In Kungwini 44 000 households did not pay for water, the Head of Water knews who they were but did nothing. SALGA must take responsibility and ensure that municipalities did provide the services they were bound to. There was also a challenge in provincial government, as to who should oversee local government, often provincial governments would fail to exercise oversight and would not report to central government.

Mr Shaik-Emam noted SALGA's reference to plans, but pointed out that despite the reference to the low allocations it was unlikely that local government would spend in full, and money would no doubt be returned to National Treasury. The real issue was that no consequences for poor performance were imposed. It was possible to speak of supply chain and pricing, but there was no standard. In  Durban a road may coast R1 million rand per kilometre, but R3 million in Cape Town. There were insufficient checks and balances and because of this people were abusing the system. Irregular expenditure took place at all municipal levels, people used  funds at a whim, citing section136(b) as their authority. There were challenges in terms of internal audits, who might investigate and be blocked, or not be provided with relevant information. It was fine to have these various departments, but SALGA must ensure that people performed and that there were consequences if they did not. It should not continue to accept excuses. He said, with no disrespect intended, that he did not believe that SALGA had the "bite" to ensure performance, asked what it would do to pursue this and wondered if the MPACs could be given more power to ensure compliance and weed out corruption.

Mr Shaik-Emam noted that SALGA said demarcation was costing a lot of money, but he did not understand why, because demarcation was designed to run the areas better, and provide services in a unified way. He questioned whether it was correct in principle, for a municipality that had a good rates base to raise money yet were not getting the money because of systemic problems, to give that municipality a larger allocation, instead of referring that allocation to another municipality with less resources. He suggested that municipalities with large income bases should be given less, with more going to poorer municipalities. He asked if municipalities could use their revenues in any way they chose, and perhaps only allocate the money from national government to address basic concerns. If so, it was highly unfair to poorer municipalities. He asked if something would also be put in place to ensure municipalities were able to collect their available revenue. He was shocked to hear about spending of R700 million on the revenue building system that was still not complete, with no back up for their computers, The system had been budgeted at R70 million and they had spent R700 million. He asked what they planned to did about issues of this nature to ensure people on the ground comply. He asked if SALGA had the power to implement and ensure there were consequences and that this gap that exist between provincial and national was addressed and that provincial government also takes responsibility for the Situation.

Ms M Manana (ANC) directed the members to page 8 of the presentation where it was indicated that SALGA continued to engage with National Treasury and the COGTA on the matter of unfunded and underfunded mandates. She asked SALGA to unpack the mandates discussed. The collection of revenue was a serious problem, and she was unaware how exactly SALGA assisted the municipalities in this regard. The billing system in most municipalities was a serious challenge that should be attended to. In regard to the comment that municipalities owed Eskom, she noted that in her consituency, municipalities were allowing people to use electricity because they said they did not have meter boxes to connect up, and her area owed Eskom close to R40 million per month and was still allowing people to use electricity for nothing. Water and sanitation was another serious problem in her constituency, despite visits to the area by the previous Minister, and she wanted to discuss this in more depth with SALGA, outside of this meeting.

Mr M Figg (DA) commented that the presentation did not discuss distribution of revenue for 2015 which he thought it would have done, and instead seemed to focus more on what SALGA intended to do in the year. Speaking to slide 8, he  asked how effective the audit committees and the internal audit function were. He asked how many Chief Financial Officers, across all 278 municipalities, were actually qualified to hold those positions

Ms R Nyalungu (ANC) reiterated this question, asking if people in strategic positions were indeed well skilled. National Treasury had said it gave SALGA support and training, and she asked who in municipalities were trained, and how often, saying that skills remained a concern. There was much unrest because of local municipalities and they needed clarity. She too asked what measures were put in place to ensure that people who owed the municipality would pay their debts. She asked for more clarity on Slide 6, highlighting the claim that SALGA would refocus the Neighbourhood Development Partnership Programme to support the development of economic hubs in large urban townships.

Ms E Van Lingen (DA) asked why the Chief Executive Officer of SALGA was not present, since many of the issues being raised by Members affected his office. She had seen no clear plan from SALGA to justify the need for more for municipalities from the national fiscus, and she commented that it had complained rather than actively stated what exactly the needs were. As far as she knew, SALGA had not instructed those municipalities that did have large assets to spend 15% to 20% of their budget on infrastructure maintenance. She hoped that the Committee would have sight of the slides not included in Members' packs, because they contained some interesting figures which could have assisted engagement. 

Ms van Lingen said the grant system was very vague and difficult, with a lot of promises, but one week ago this Committee had heard that many of the existing grants were not  spent properly, and she remained concerned that not enough was being done to ensure that grants were spent efficiently and effectively, because the system was now being opened up to allow for the transfer of funds from one grant to the other more easily, and despite a centralised supply change management system, it was difficult to ascertain what grant would land where for infrastructure. For instance, she questioned where the bucket eradication grant - of over R900 million - would go, and who would organise it, pointing out that in the Eastern Cape there were regrettably still far too many buckets being used in municipalities. Recently, it was announced in the Government Gazette that R500 million was re-allocated from Limpopo and given to KZN and the Eastern Cape for housing. She asked why the problems were not ascertained earlier, and steps taken to ensure that matters were working in Limpopo?

Ms van Lingen said the document speaks of a "workable district revenue generation and funding model", but it was worrisome that district government had been given other options of funding, yet suddenly there was a plan to impose another levy at a district level. This would take a lot of manpower and organisation to re-implement. A clear plan was needed from SALGA on its intentions.

Ms van Lingen also commented on the indebtedness of local municipalities. She too referred to the possibility of encouraging them to borrow. However, she pointed out that municipalities tabled income- inflated budgets so that the budgets would balance, and then they had a problem collecting their own revenue, and this was where the problem lay. They would then write off a large amount of debt so that their books did not look too bad. This was a vicious cycle, and a serious position must be taken on municipal debt if there was to be progress. Only if there was control, from the municipality and province, on municipal debt, with people being held accountable and accurate statements being produced, could the problem be addressed.  Much of local government’s debt lay at the door of the MECs and the Minister.

Ms van Lingen noted that she had heard that only 170 Chief Financial Officers, in the 278 municipalities, were qualified to do their job. She also wanted to know how many other managerial staff - including the section 56 and 57 municipal managers - were properly qualified. SALGA announced the appointment, the unions were involved and then no one took responsibility for appointing qualified people instead of cadres.

Ms van Lingen described the BEPPS  as "a scary issue" and said there needed to be more information given on this before the Committee could comment.

The Acting Chairperson thanked the Members for their questions and said she did not see SALGA being visible and active when the municipalities suffered and struggled and were unable to do what they were supposed to do. The Committee expected SALGA to be the first to act proactively, and come up with a plan. National Treasury was visible, but SALGA and the provinces were not. She urged SALGA to make its presence known in the municipalities, and to really assist them. It was insufficient to work just with National Treasury, for it was not just a financial issue, but there were also issues of skills and effectiveness of the managers. She urged SALGA to assist the MPACs also, because they were not taken seriously enough in the local governance system.

Mr Pillay said, in introducing his responses, that his intention had been to present specifically on the Division of Revenue Bill (DORB). Although the presentation appeared to discuss a whole range of other matters that did not speak directly to the Bill, all of the issues were, by their nature, policy and principle issues that had an impact on how the division of revenue was structured. Thus, for instance, SALGA believed that it must address funding, fiscal arrangements and other matters, in order to get the division of revenue correct. He had not asserted that the DORB was hopelessly flawed, and had indeed mentioned where SALGA thought it was effective.

All members raised questions about the role of SALGA. It was not government and did not have the ability to instruct, compel or give powers to municipalities. The Constitution established SALGA as one of the MP5s, through the Organised Local Government Act, and its principal responsibility was to represent the interests of municipalities, and to coordinate policies and programmes. With respect, there was often a misunderstanding as to the role and function of SALGA. SALGA's main responsibility was to coordinate the challenges and policy issues impeding municipalities, individually and severally, from discharging their mandate and then to formulate policy options to put to the national legislature that might enhance the ability of local government to discharge its mandate. He had tried, in his presentation, to suggest how this could be achieved with specific interventions that SALGA did for member municipalities. Municipalities were members of SALGA.

Mr Pillay noted that there was a focus on own revenue for metropolitan municipalities, because these accounted for well over 65% of economic output in the country. There were eight metros and about 15 to 16 bigger cities. If the system in these municipalities could be perfected, it would create a kind of critical mass of municipalities that were doing the right things and discharging their responsibilities properly. The issue around revenue collection was certainly not limited to one grouping of municipalities, but extended to all. He had, however, focused on the 20% because they produced 80% of the outcomes needed to borrow from creditors. He agreed that they were not collecting, but this was largely due to institutional inefficiencies. This matter had been raised before many Parliamentary committees.  Local Government needed greater legislative ability that would sanction and make it difficult for residents to not pay their municipal debt. Only Parliament, however, could produce such legislation; SALGA could not. He had suggested that the legislation should be amended to introduce a regime similar to SARS, allowing for a national or individual collection agency. SALGA was not attempting to shy away from the fact that municipal finances were not well managed.

He agreed that municipalities must be structured and resourced correctly. There must be competent, qualified senior managers, CFOs and the like. Municipalities had to contend with socio-economic conditions nationwide, and it was speculated that 23% of South Africans remained unemployed with no income, suggesting that municipalities would struggle to collect because people did not have the ability to pay. This must be addressed by municipalities' own indigenous policies and also, in part, by the DORB. However, the only enduring solution to ensure higher collection levels was to grow the economy to create opportunities for more people to be gainfully employed so that they had an income in order to pay. Once this was established, then municipalities would be better able to recover.

Mr Pillay stressed that there needed to be further discussion on the issue of debt in municipalities, in light of the nature of the historic deficiency in the provision of infrastructure, the maintenance backlogs and the kind of infrastructure that was needed. Critical discussions and input were needed on how this would be financed, with the principle that "user pays", so that, for instance, those who derived benefit from a reservoir must pay for it. He pointed out that with long-term infrastructure, there should be no problem in increasing borrowings, as long as efficient spending was achieved, and there was consciousness of the fact that this was an investment in infrastructure to grow the rates base and municipal revenue ability against objective value for money. It was not a linear response only for there was a whole permutation of issues to be addressed before the borrowings could be reduced. The debt to income ratio meant that against borrowings, there must be a raising of revenue to contain the ratio. Investors would be reluctant to lend to a municipality that could not repay; so it came down to the municipalities then securing their own debt and collecting from their residents, which should be implemented in a more sustainable way.

Mr Pillay noted that he had made reference to the 10% of national fiscus before this Committee, because it had a constitutional responsibility to assist SALGA in ensuring that proper allocations were made to municipalities. There were three levels for utilities: the bulk provisions, being those who built the power stations and dams; then transmitters from the bulk point to the point of reticulation; then those who took it (reticulated) to household level. National and provincial governments took responsibility through its institutions such as the Water Boards and Eskom, for the bulk production and transmission, but municipalities were responsible for reticulation. There was no confusion about who did what, as the legislation was clear on this point, but whether each party was actually doing what was expected was another point. The system was porous, and the entire value chain needed to be strengthened.

Mr Pillay moved on to questions about the audit committee and other committees, and said there was a need to look at both quantitative and qualitative aspects. Current intervention options had been quantitative, merely ensuring the existence of committees and setting the reporting line, compared to the position a few years back when the MPAC and other institutions did not exist. The qualitative intervention would then look to whether MPACS were able to raise issues, and, when it did, what trends followed, and whether consequences in municipalities were managed.  He agreed that there was poor consequence management in municipalities, and this was an issue that must be continually be addressed in the qualitative interventions. Unlike in national and provincial government, there was no clear separation of power between the legislative, oversight and executive functions of municipalities. The Constitution said that legislative and executive oversight municipal functions were vested in the municipal council. SALGA had lobbied for national legislation to draw a line between the discharge of executive responsibility and ensuring oversight over what was done. Most MPACs, for instance, had only one full-time member, the Chair, which hindered them from discharging their duties. The reporting lines were not clear, and each municipality decided how an MPAC reported to Council. This needed to be clarified by national legislation. He pointed out that Parliamentary committees did not report to a Minister or Department but were directly accountable to Parliament as a whole, because they performed an oversight function, but this was not so clear with local government.

Mr Pillay then answered questions on the demarcation. The R39 million amount referred to the 2015 fiscus, and R139 million to the Medium Term Expenditure Framework.

In relation to the BEPPs and Integrated City Development Grant, he noted that there had been discussion with  National Treasury on the consolidation of grants and this was also raised with the FFC. There had been fragmentation of grants, for instance, across water, electrification, transport, and the more fragmented the grant system, the more it also resulted in fragmentation of integrated municipal planning. Planning was not done by sector, and the sectors themselves did not know where development was needed. SALGA had always contended that there should be a consolidation of the grant system, so that sectors could integrate planning and achieve greater efficacy of impact.

In relation to lack of consequences, Mr Pillay agreed and said that this was a point continuously raised by the Auditor-General. This was partly a political problem, for political leadership in municipalities did not take responsibility for consequence management, which was reflected in the consolidated audit outcomes. Where there was strong political leadership, there were better audit outcomes, and the converse also applied. This was another example of where strengthening the legislation would help.

Mr Pillay said that the system of government compelled the spheres to act in a manner that enhanced cooperative governance. The Constitution introduced spheres of government, and since there was no hierarchical relationship between the three spheres, there was joint responsibility. Often, the approach was akin to a principal / pupil relationship which did not build capacity or enable sustainable responses to problems. The broader issues needed to be addressed and corrected. SALGA did not seek to legitimise municipalities acting as though they were islands, and fully supported the need for an inter-governmental relationship.

In relation to efficacy of procurement, there were a range of national reforms that National Treasury could speak to, and there was debate as to whether centralisation was the answer. It was hoped that the porous nature of the procurement process could soon be rectified.

The unfunded and underfunded mandates comprised of two elements. Firstly, the FFC was created to ensure that the fiscal impact of legislation was understood - for instance, the Spatial Planning and Land Use Management Act placed responsibilities on local government, and it must now determine how to fund those responsibilities. This had more direct links too; for example the provision of amublance services was a provincial competency, but was undertaken by municipalities, through agency agreements with provincial governments. The municipalities must determine, on a set ratio of one ambulance to 100 000 people, how much the province must give each municipality to buy its ambulances. However, in almost all cases, these were under-funded. Local government was aware of its duty, but if it were to fund only to the extent of allocations from other spheres, ould cut down the number of ambulances, and if it did not, then it was taking on an unfunded mandate. Other legislation with fiscal impact included the amendments to the Property Rates Act and Public Service Act.

Mr Pillay agreed that SALGA had no teeth for this was not mandated by the Constitution. He stressed again that it was principally a body that represented organised local government. SALGA made policy proposals to the legislature, having regard to the impact of various mandates for local government, and made presentations to committees. SALGA would constantly refer to other organisations with whom it worked, in the context of the intergovernmental relationship arrangement. Multiple bodies had a responsibility for putting local government to rights - including COGTA and other departments and institutions that impacted on the work of local government. SALGA was only one element of the broader chain. Until the coordination was  right, the impact would be lessened.

Mr Pillay explained that demarcations were expensive because the Demarcation Board would consider revenue bases in the two (or more) municipalities before deciding to merge. SALGA submitted that this needed to be determined completely and could not be left to speculation. For example, Tshwane merged with Metsweding district in 2011. However, it spent  R1.2 billion just to get salaries right and systems running, and then still had to provide and increase other services. The argument was put forward that Tshwane, by itself, would not  be economically viable. There was indeed clear economic potential to be tapped, but this needed resourcing and infrastructure, and the question was whether that was a responsibility of government jointly, or only the municipality.

Mr Figg reminded Mr Pillay of the question on qualifications.

Mr Pillay said that the figures previously quoted by Ms van Lingen were known to SALGA, and it was doing much to ensure that those already appointed were capacitated. When new appointments were made, COGTA and National Treasury insisted upon certain minimum competency requirements being met for financial practitioners. SALGA did not sit in on the interviews, although it continued to support municipalities and other spheres.

Mr Pillay apologised for the absence of the CEO, who was attending another meeting, but said that unless there had been a specific request for his attendance, SALGA believed that others, such as himself, were fully able to address the Committee and respond to questions.

Mr Pillay concluded that SALGA had made detailed submissions on a range of issues to the Committee, including the amendments to the Equitable Share formula, on which SALGA made considerable contributions. He also said that SALGA would contribute much to the process for quantification of basic services.

Mr Pillay noted that another area of joint responsibility was ensuring effective spending of grants. There was a skills deficit in the country and that was why there was emphasis on both providing the grants and the ability to spend those grants. Although the Committee had been a little dismissive of  the investments made to institutions like MISA, they were an important component of SALGA's ability to address the challenges of the National Development Plan, which aimed to achieve a capable and capacitated state. In order to achieve this, it was necessary to invest in upgrading the skills of the people.

Speaking to the district funding models, he noted that District Municipalities had no tangible income aside from agreements with locals, so there needed to be a discussion on fiscal issues and the funding of local government, to determine how to address this. He noted that the income projections were made by budgeting income for the client base. If revenue was underestimated it could give rise to an audit qualification, If it was based on historical figures, this could give rise to under-collection. Local government was now15 years old, and after the first transitional period to 2000, a whole range of legislation had been introduced that impacted on local government, such as the MFMA, and amendments to accounting standards. There had been no phase of stabilisation, and he urged that local government must be allowed to mature. The constant chopping and changing must cease, as it impeded local government. Municipalities should take ultimate responsibility for collections. The public sector, especially local government, must be professionalised.

Speaking to the visibility of SALGA, Mr Pillay said that SALGA too faced funding constraints and could not have a strong presence in every municipality. It was focusing on 20 municipalities who achieved the 80% of input, although ideally it should be visible on the ground in and amongst all municipalities. He pointed out that SALGA was one of very few government institutions with a clean audit . SALGA believed in leading by example, and felt that it was setting a good example for its municipalities to follow.

Mr Joseph Munyu, SALGA Councillor, Eastern Cape,  strongly agreed that the under-10% allocation was insufficient to address the needs of local government. He added that in the last elections there were many demonstrations, based around water, sanitation, electricity, roads, housing and the perception of corruption. He did not agree with the assertion that municipalities did not perform service delivery. Section 162 of the Constitution spelt out the objectives of local government, and  key performance areas were institutional development and transformation; sustainable service delivery based on IDP, budget and Spatial Development plans; local economic development; municipal financial ability; good governance, and public participation.  When compiling the annual performance report, all these must be addressed, and not only service delivery. The relevant institutions were dependent on each other to address these questions.

He added, in relation to the impact of MPACs, that section 151 of the Constitution placed all authority on municipal councillors, whether it was legislative or executive. He agreed that this needed clarification by legislation, otherwise they would continue to pass the blame from one to another. There was no set authority for the MPACs, other than the National Treasury Guidelines and the guides from SALGA.

Mr Simphiwe Dzengwa, Executive Director: Municipal Finance, SALGA, thanked the Members for their comments and said the remarks  were appreciated by SALGA. He also tendered apologies on behalf of the CEO, Mr George.

Mr Dzengwa noted that when the Auditor-General presented the audit outcomes for the 2014/15 year, he would also give an indication as to what had improved. There had been an 80% increase in the number of municipalities getting clean audits. There was a general trend of improvements across the board, which could be attributed to MPACs, as well as the role played by audit committees and internal audit functions guiding municipalities towards better audit outcomes.

Mr Dzengwa agreed that visibility was an issue for SALGA. However, in July 2014 it had launched the  Municipal Audit Support Programme, in which it, particularly, assisted the 79 municipalities with adverse audits to improve, by providing support, training and guidance, which still continued. SALGA had gone out of its way to guide at least two municipalities per province and assist them in turning around.  SALGA acknowledged that this could not be achieved in a year. However, it was making strides.

He pointed out that it was impossible to understand the issues affecting local government without understanding the economy of local government in South Africa. For example, on the issue of household collections and debts to municipalities, he pointed out that there was a trend of migration to metro areas by people looking for opportunities. They would demand better services from these metros but could not afford to pay for them. This could be due to a combination of circumstances, and whilst it might be that people would refuse to pay for poor services, it was more likely an issue of people unable to pay, rather than not wanting to pay, because of the state of the economy. There were also a number of revenue options for municipalities. He cited the land tenure situation in Bushbuckridge, which had a population of about 800 000 people, but a large chunk of land under traditional leadership, therefore non-rateable, from which the municipality could derive no revenue. National Treasury was currently spear-heading legislation to deal with the exemption of state infrastructure from property rates. This, if passed, would have a huge impact on municipal revenues, and whilst it would necessitate adjustment to the equitable share, it would also allow for new schools and clinics to be built. SALGA acknowledged the difficult issue of municipalities owing Water Boards and Eskom, and agreed it must be addressed, but it did not necessarily equate directly to government owing amounts to municipalities. SALGA was working on this, and was providing hands-on assistance in some municipalities.

He noted the request that SALGA made specific proposals on its needs. This had been raised with National Treasury, and SALGA had worked with the FFC and other stakeholders to cost basic services, noting the discrepancy between the equitable share and the real cost of providing the services,F

He noted that the media carried incorrect information on the qualifications of the CFOs, for it had quoted the Minister of Cooperative Governance and Traditional Affairs as saying that a number of CFOs were under-qualified, but did not clarify that the under-qualification was not related to their educational accreditation, but the fact that they may not have gone through National Treasury's specific training on minimum competencies.

He commented that on the demarcation issues, a proposal was made to NT that SALGA, FFC and NT should look into the costing implications of demarcation, but that related only to the areas initially gazetted in KZN and Gauteng. The calculations came to about R327 million, and this was substantiated in various documentation, but National Treasury had thought that R139 million should be sufficient. Colleagues in KZN had since done further analysis, per municipality, and fortunately National Treasury was present when it was generally acknowledged that the amount was likely to be higher than indicated in the Division of Revenue. It would be worse if the new proposed areas passed the demarcation criteria and were determined.

He made the point that SALGA had been proactive about exposing discrepancies. SALGA comprised municipalities and if they felt that SALGA was not offering them value, they would not continue to be part of SALGA, and the fact that they had not objected meant it must be doing something right; its members continued to petition SALGA for support and assistance. In the Eastern Cape SALGA had implemented a number of initiatives. This was where it was testing the unfunded mandates issue, which it then intended to make a detailed presentation on, to National Treasury.  National Treasury had piloted a new reform for chartered accountants at municipalities, which was a huge change and would require systems, training and significant money - for NT was not funding it, and this was another example of an unfunded mandate. However, he agreed that these reforms were necessary and the financial support would have to be found.

National Treasury input
The Chairperson called for any input from National Treasury.

Ms Wendy Fanoe, Chief Director: Intergovernmental Relations, National Treasury added that National Treasury would like to give some guidance to the Committee on some of the issues raised. SALGA said that it was not happy with the figure allocated to local government. The Committee needed to discuss this in some detail. On page 89 of the Division of Revenue Bill, it was stated that if indirect transfers were taken into account, the percentage of the allocation actually becomes higher. Over the last decade, transfers to local government had grown much faster than any other transfer in government. In 2006/7, the total share that went to local government amounted to R11 billion. In 2015/16 it amounted to R50 billion and the 10% figure was estimated also to take into account the indirect transfers.

Potential additions had been made to the equitable share to local government conditional grants in the past, but the impact of such additions was still to be seen. Part of the problem was that whilst the local government infrastructure transfers had increased substantially, the municipalities did not have the capacity to make full use of them, nor to spend in full. There was thus a need to improve the capacity of municipalities to ensure that there was value for money.

Another more controversial question concerned where the increased governmental equitable share had gone - and whether, in particular, it had been put to increasing provision of basic services to the poor, or to increasing salaries of municipal staff members. She reminded the Committee that whenever looking at the  local government fiscal framework (and the same would apply to the provinces who only got 5% of revenue) it must be realised that the grants were made available, both through the equitable share and infrastructure grants, to fund the gaps in the system and not to fund inefficiencies. Therefore, if municipalities failed to collect their own revenue they could not claim to be underfunded in the equitable share or infrastructure grants.

It was also necessary to highlight that the international standard for technical losses, such as water collection and electricity collection, was set at 3.5%. Even the best performing metro in South Africa in 2011/12, eThekwini, was only achieving 5%. All other larger municipalities ranged from 10% to 15%. The question was how much revenue was forfeited because of these inefficiencies. EThekwini, through effort and spending, managed to increase its revenue collection substantially because it had proactively addressed the leakages, but unfortunately some of them returned over time. She stressed that all the issues had to be considered together.

Ms Fanoe moved on to addressing water transfers and said that the conundrum in the system was that the general grants were reserved for municipalities, and they were free to determine how they used these. However, the water and sanitation sector grants had more impact, because the sector departments had more oversight and could therefore greatly influence the progression of the projects and how the money was spent. For the future, it might be best to have a combination of general purpose municipal infrastructure grants and more sector-specific grants. That consolidation could also have its downside, because sector oversight was quite important. There needed to be a departure from viewing the BEPPs as plans only, although they were a new way of planning. In the interim, the Infrastructure programmes were running while other interventions were being implemented. The idea was to move away from scattered infrastructure spending towards more integrated spending over time. It was a transition into greater efficiency. National Treasury could make a more specific submission to the Committee on this.

With respect to district municipal funding, before National Treasury could justify allocating more funding to this venture, it must clarify the actual functions or services the district municipalities must provide, and from there determine what would be appropriate funding. One of the biggest constraints was that the proper functions of the districts were not known by National Treasury. The Municipal Property Rates Act was not National Treasury legislation, but came from the Department of Cooperative Governance.

Mr Shaik-Emam asked for clarity on the topic of the standard for technical losses, where 3.5% and 5% were the norm, and asked what this related to.

Ms Fanoe confirmed that this was in relation to water.

Concluding remarks
The Chairperson thanked SALGA and asked its presenters to give as much information as they possibly could, since the Committee was composed of highly committed Members devoted to their role and task. This was only the beginning of the engagement. It was necessary to ensure that the state’s money was spent correctly. She had been alarmed at the economic state of the country being described as "precarious", but had faith in National Treasury and in the banking system. She felt it would have been better to describe the economy as "experiencing difficult growth" but she was aware that the epithet had not intended to convey a sense of disarray in South Africa’s financial management system. The Committee was responsible for the allocation of resources, and made its decisions on the basis of different inputs, but Members could only do their jobs if they had enough information. The Committee had the capacity and would to go through all the information presented; it wanted to hear all sides and would attempt to verify whatever was heard.

Mr Pillay stressed that he had not intended to put across a subjective view of the economy, and SALGA based its statements on publicly available documented reviews of the state of the economy.

The meeting was adjourned. 

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