Division of Revenue Bill [B5-2015] negotiating mandates: National Treasury response; Final mandates

Meeting report

Division of Revenue Bill [B5-2015] negotiating mandates: National Treasury response
Ms Wendy Fanoe Chief Director: Intergovernmental Policy and Planning, National Treasury presented responses to the Negotiating Mandates of Provinces which had made comment and recommendations on the 2015 Division of Revenue Bill.
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Response to Eastern Cape Provincial Legislature
(a) “Much as there has been a review of the Local Government Equitable Share formula there has been little reprieve for municipalities. A backlogs portion should be considered.”
The explanation by National Treasury was that the new Local Government Equitable Share formula was pro rural as the basic services component of the formula subsidised the cost of providing basic services to all poor households. The previous formula only provided a partial subsidy for households not connected to services. The institutional and community services components of the formula and the revenue adjustment that applied to them ensured that most of the funds from this part of the formula were provided to municipalities with limited revenue bases to run their administrations and provide general services.
(b)”The under-funded mandates such as the library services grant in municipalities were contributing to the adverse audit outcomes in the municipalities as municipalities were obligated to use their own funds to sustain these services and then they got punished by the Auditor General.”
 The response was that the library function was assigned to provinces in terms of the Constitution and this function was funded through a conditional grant to provinces. In some cases however municipalities performed the function on behalf of provinces, in these cases a service level agreement between the province and the municipalities should stipulate the funds for the function that would be transferred to enable municipalities to perform the function.
(c)“Provincial Division of Revenue Bill should also be brought to the municipalities for consultation and inputs thereof.”
The legislative process for considering the Division of Revenue Bill was prescribed by the Money Bills Amendment Procedure and Related Matters Act. National Treasury agreed that municipalities should be consulted as part of the process. Municipalities were also consulted through the South African Local Government Association (SALGA) in the preparation of the Bill.
(d)“The amount of money allocated for roads maintenance was insufficient as some districts needed good road networks to continue with the agricultural economy.”
National Treasury was aware of the challenges with road maintenance. The review of local government infrastructure grants was exploring how the rules around roads funding in the Municipal Infrastructure Grant could be changed to allow funds to be used for road maintenance as well as for the construction of new roads. Provinces received the Provincial Roads Maintenance Grant; the allocation was based on the extent of the road network in each province as well as the climatic conditions that affected the levels of maintenance required on that network.
(e)“The water provisioning system together with its associated infrastructure maintenance was expensive, the Municipal Water Infrastructure Grant (MWIG) together with other water services associated grants were not enough for proper provisioning of water and sanitation services.”
National Treasury’s response was that water and sanitation funding was provided through the Municipal Infrastructure Grant, Regional Bulk Infrastructure Grant, Urban Settlements Development Grant, Municipal Water Infrastructure Grant, Water Services Operating Subsidy, and the Rural Households Infrastructure Grant. The total combined allocations available through these grants were R34.5bn in both direct and indirect grants to municipalities in 2015/16 with the majority of these funds going towards the provision of water and sanitation services. The Local Government Equitable Share also subsidised the cost of providing free basic water and sanitation to indigent households with R19.4bn for operational costs over and above the grant funding. For non-poor households and businesses, water and sanitation services should be funded through tariffs on these services collected by municipalities. Taken together, the transfers and own revenues available to municipalities should be sufficient to fund water services provided by municipalities. In many cases municipalities were not even able to spend their full grant allocations.
(f) Recommendations:
Intergovernmental relations processes must be intensified - National Treasury agreed with the recommendation and was working with provincial treasuries and SALGA to strengthen the functioning of intergovernmental forums.
National Treasury must ensure that there was capacity to spend grants when they were allocated - Treasury agreed that capacity should be an important factor when allocating grant funds. Each grant had its own allocation mechanism that took account of the capacity of provinces and municipalities in different ways.  

Response to Free State Provincial Legislature
(a)”Having noted that the Free State, in particular the Xhariep District was a predominantly rural and poor whose structural outlay represented significant challenges and constraints to the economic performance of the province and the benefits that were supposed to accrue there from.”
National Treasury responded that the intergovernmental fiscal system acknowledged that levels of economic performance were very different in different parts of the country. As a result the intergovernmental fiscal system was designed so that provincial governments were funded mainly through transfers of nationally raised revenues (on average 97% of provincial budgets were funded from transfers), so that they could provide health, education, social and other services irrespective of how poor an area may be. Under the two tier system, municipal functions were shared between district and local municipalities. Funding for a function was allocated to a municipality assigned to perform a function. In the case of Xhariep District Municipality basic municipal services such as water, sanitation, electricity and refuse removal were assigned to the local municipalities. In Xhariep District Municipality most of the grant funding was allocated to local municipalities rather than to the district municipality.
(b)”Some provincial roads must be handed over to the National Department of Roads and Transport.”
National Treasury noted that the Committee of Transport Officials (COTO) had agreed that 11 000 kilometres of provincial roads in the Free State should be proclaimed national roads. The decision was based on an assessment of the use of the roads, which found that in terms of the Road Infrastructure Strategic Framework for SA classification for their use indicated that they should be classified as national roads.

Response to Gauteng Provincial Legislature
(a)”That fiscal rebalancing which included cost containment measures and intensified efforts to improve efficiency in expenditure to realise government’s programmes in a tight fiscal space, should be continued.”
Treasury agreed with the recommendation and would continue to ensure spending remained within the revised expenditure ceiling set in the 2014 Medium Term Policy Statement and 2015 Budget. Measures to promote efficiency, limit costs and reprioritise funding to urgent priorities would continue to be strengthened as a means of ensuring government was able to achieve its objectives within the spending ceiling.
(b)”That infrastructure investments should be monitored by expeditious spatial integration of the urban poor into the mainstream of city life, through investment in transport infrastructure and the connecting of development.”
National Treasury agreed on the importance of promoting spatial integration through the way infrastructure investments were made in our cities. The Division of Revenue Bill required metropolitan municipalities to prepare Built Environment Performance Plans that set out how a city’s infrastructure investments would be used to promote spatial transformation in the integration zones identified by the city.

Response to Limpopo Provincial Legislature
(a)”Proper planning and capacity to spend on conditional grants must be encouraged across all receiving departments. Parliament and the Provincial Legislatures should therefore ensure that expenditure on conditional grants was closely monitored on a continuous basis.”
National Treasury supported the recommendation and provided information on the spending of conditional grants through monthly and quarterly expenditure reports that could assist legislatures in this important work. The national departments responsible for administering conditional grants also compiled quarterly non-financial performance information that could assist in monitoring how effectively and efficiently funds had been used to deliver services.
(b)”National Departments and Provincial Treasuries should continuously empower provincial departments and municipalities to efficiently spend on their allocations.”
Treasury supported the recommendation and noted that there were a range of measures in place to build the capacity of provinces and municipalities. For provinces there was the Infrastructure Delivery Improvement Programme and for municipalities there was the Financial Management Improvement Programme.
(c)”Empowerment of financial management units was critical to ensure sound financial management. Appropriate skills should therefore be accordingly provided to personnel responsible for financial management.”
National Treasury was in agreement that an appropriately skilled financial management team would improve financial management outcomes and this was why a number of interventions had taken place to improve these outcomes while other interventions were in the pipeline. 

Response to Mpumalanga Provincial Legislature
(a)”Full allocation of the equitable share to the province needed to consider daily migration of the bordering countries’ citizens that utilise health, education and social development facilities.”
The calculation of the equitable share currently accounted for daily migrants making use of health, education and social development facilities in South Africa.

Discussion
Mr C De Beer (ANC, Northern Cape) felt it crucial that provincial legislatures had to interact with the Financial Fiscal Commission (FFC) more than once a year. On Municipal Infrastructure Grant (MIG) funding, he said the MIG had to be transferred to district municipalities for stricter control. Furthermore, the Parliamentary Budget Office (PBO) could assist with workshops on financial oversight and budget analysis to provincial legislatures.

Ms E Van Lingen (DA, Eastern Cape) said that she did not quite agree with what Mr De Beer had said. She did not think that district municipalities would have stricter control over MIG funding than local municipalities. She said that more layers of people were not needed to improve accountability, people who were in place needed to be held accountable. MIG funding could stay with local municipalities.

Ms Fanoe responded that in some provinces, water and sanitation was authorised by local municipalities whilst in other provinces it wasauthorised by district municipalities. MIG funding would therefore go to the municipality that was authorised. There were instances where local and district municipalities had authorisations and service level agreements between them were needed. She added that provincial legislatures should do oversight

Mr L Gaehler (UDM, Eastern Cape) noted that if capacity had to lie with the local municipality, this could become a problem.

The Chairperson said that the Committee in its oversight needed to look more closely at grants and performance. He asked how the responses given by Treasury would be communicated to the provinces.

The Committee Secretary said that it was his responsibility to forward the National Treasury response to the negotiating mandate comments and recommendations to the provinces.

Mr Gaehler noted that he had already forwarded Treasury’s response to his province, the Eastern Cape.

Mr T Motlashuping (ANC, North West) agreed that the responses needed to be communicated to the provinces but was under the impression that the Chairperson had also meant for there to be a more interactive approach with the provinces.

The Chairperson said that the Committee needed to find a way to amplify what was contained in the responses. Issues had to be dealt with proactively with the provinces.

Mandates on the Division of Revenue Bill [B5-2015]
Eastern Cape Province
Mr Gaehler noted that he did not have the final mandate document of the Eastern Cape Provincial Legislature to submit to the Committee as yet but emphasised that the Eastern Cape supported the Bill.

The Committee Secretary said that given that the actual written final mandate was not with the Committee, the mandate in favour of the Bill could not be tabled. He did note that the final mandate could still be tabled in the House.

Free State Province
The Chairperson noted that the Free State Province voted in favour of the Bill.

Gauteng Province
Ms T Motara (ANC, Gauteng) said that the Gauteng Province voted in favour of the Bill.

Kwazulu-Natal Province
In the absence of a representative from the Province, Ms Motara being the Chief Whip of the Committee, stated that the KwaZulu-Natal Province voted in favour of the Bill.

Northern Cape Province
Mr De Beer said that the Northern Cape Province voted in favour of the Bill.

North West Province
Mr Motlashuping stated that the North West Province voted in favour of the Bill.

Mpumalanga  Province
Mr Essack noted that the Mpumalanga Province voted in favour of the Bill.

Western Cape Province
In the absence of a delegate from the Western Cape Province, Ms Motara stated that the Province voted in favour of the Bill.

Limpopo Province
Ms Motara stated that the Province voted in favour of the Bill.

The Chairperson commented that there was unanimous support for the Bill.

Ms Van Lingen requested that members be given electronic versions of the final mandates that had been received late.

Committee Report on the Division of Revenue Bill [B5-2015]
The Chairperson placed the Draft Report before the Committee for consideration. He emphasised that the issue of withholding funds from municipalities by National Treasury was something which needed extensive consultation.

Mr De Beer responded that there was an ongoing process over the issue. The Committee had in its previous meeting requested Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, National Treasury, to brief the Committee on a quarterly basis on the progress that was being made. He suggested that it be added as a recommendation in the Committee Report.

Ms Van Lingen was concerned how the withholding of funds by National Treasury affected municipalities that were under administration. Would it not make matters worse?

The Chairperson said that it needed to be reflected in the Committee Report that the withholding of funds was an issue that required further engagement.

Mr Motlashuping got the impression that the feeling of the Committee was that the issue needed serious consideration.

The Chairperson pointed out that the Committee Report was a fair representation of the process and the work of the Committee on the Bill.

The Committee adopted the Committee Report unamended.

Committee Minutes
Committee Minutes dated the 21 April 2015 were adopted unamended.

The meeting was adjourned.