How Local Government & Provincial Equitable Share Formulas work: Treasury briefing; Stoppage of Local Government Equitable Share to 60 municipalities: FFC briefing

Meeting report

Briefing
National Treasury on how Local Government & Provincial Equitable Share Formulas work
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning at Treasury, said that local government and provinces were entitled to the equitable share to provide basic services and perform prescribed functions. Budgetary conditions were set as well other requirements to ensure the money was used as allocated. There were controls over how the money was spent based on section 214. While it was more difficult to withhold equitable share money as compared to conditional grants, it was not impossible. Section 214 required that a Division of Revenue Act (DORA) be passed each year where national income was divided amongst national, provincial and local government spheres and account was taken of provincial and local government’s own income generation so that monies were equitably divided. Local government generated own revenue of R200b. Provinces generated 3% of own revenue while local government received R45b in unconditional grants and R36b in conditional grants plus a further R10b in indirect grants in 2015/16. The equitable share targets the funding of basic and free services but it could not fund gaps in municipal revenue collection. She said it was easy to question the equitable share formula but Treasury only used information that was transparent and easily available so as not to penalise municipalities. Most of the information came from official data supplied by Statistics SA.

Mr Steven Kenyon, senior economist at Treasury, said the provincial equitable share (PES) comprised six components: Health, Education, Basic, Poverty, Institutional and Economic. The division was based on population weightings which applied to four of the components. The weighting was not prescribed and the money was unconditional allowing the province flexibility to budget. There had been two major reviews of the PES, with the latest being in 2010. The PES was regarded as a blunt instrument as it transferred a lump sum for a basket of services. He used the Eastern Cape as an example to show the calculations for the various components (see presentation).

The Local Government Equitable share (LES) was a new formula which was still being phased in, being in the middle of a five year period. The phasing in was occurring at the same time as the new census data of 2011 was being used, and as such there was a double whammy effect. There had however been a review process of the formula. He then spoke to the principles and objectives of the formula and the structure of the formula. The formula had two main parts: a basic services component to subsidise the delivery of free basic services; the second part comprised community services and an institutional component for administrative costs and this was to assist municipalities that could not raise own revenue to cover these costs. Poor rural municipalities would get 100% of this component while those that could generate large own revenues like the Johannesburg and Cape Town metros would not receive it. There were annual updates to the cost and household data used in the formula. He then spoke to the differences between the old and new formulas and the impact of the new formula.

Discussion
Mr C De Beer (ANC; Northern Cape) said that Treasury should give the presentation at provincial legislatures. FFC was going to be visiting all legislatures, perhaps Treasury could do so at the same time.

Mr Subesh Pillay, South Africa Local Government Association (SALGA) NEC member for Finance, said there was no question SALGA had played a role and that the formula was a vast improvement on the previous one. Basic services remained a work in progress and more work needed to be done to determine aggregate costs regarding the basket of services offered by municipalities. Furthermore the impact of increases in bulk services from Eskom on municipalities needed to be looked at with reference to the CPI increase granted to municipalities where the contents of the CPI basket of goods and services differed from the basket of goods and services offered by municipalities. Perhaps there was need to develop a municipal cost index by a body like the FFC for example.

Ms E van Lingen (DA; Eastern Cape) said she was glad to hear the census figures had been updated. Were they available to other departments such as the police? She said the cost of bulk services was worrisome and soon the poor would not be able to afford electricity.

Ms Fanoe replied on the cost of bulk services, saying Treasury together with all stakeholders were looking to improve costing using data received from regulators. She said the same applied for the provincial formula. On data updates, she said it was done via a methodology approved by Stats SA. Data generally had a ten year lag but was valid for about five to six years.

Financial and Fiscal Commission (FFC): Withholding of LES allocations
Mr Bongani Khumalo, Acting CEO FFC, said they had been alerted to the issue through a former commissioner of the FFC. He said that if the intervention had to take place, citizens should not be unduly affected. He said section 216 of the constitution allowed Treasury to stop transfers to municipalities in the event of gross misconduct or persistent non compliance. Sections 38-40 of the MFMA allowed treasury to stop allocations for persistent non compliance with DORA.

Mr Mkhululi Ncube, FFC program manager for local government, spoke to municipality’s debt to Eskom and the Water Board. The major debtors of Eskom were Free State, Gauteng and Mpumalanga municipalities. which accounted for 60.3% of the total debt of R9.4b The major debtors in arrears to Eskom were municipalities in Mpumalanga , Free State and the North West which accounted for 82% of total arrears debt. The Water Board was owed R3.6b in total. The Local Government Equitable Share (LES) allocations accounted on average for one third of their operating revenue. In one district municipality the LES accounted for 97% of operating revenue. He then spoke to recent developments on municipalitiesarrangements to pay.

Mr Khumalo said the principal of cooperative justice should hold. He understood Eskom’s position but the consequences were equally dire for municipalities because of the poor performance of the economy and because of the non payment for services by households. He said the long term solution lay in the Intergovernmental Relations Framework.

Discussion
The Chairperson said that the purpose of withholding the money was to encourage the municipalities to pay its electricity and water debt but what if it resulted in no payments.

Mr Muthotho Sigidi, Deputy Director General: Intergovernmental Relations at the Department of Cooperative Governance, said that one critical issue that was identified was the cost reflectivity of tariffs and the tariff given by NERSA to Eskom. When NERSA approved the increases it gave Eskom an 8% increase while municipalities had a maximum 7.39% increase with a municipality on average getting a 5.1% increase.

Mr Thabo Manyoni, SALGA Chairperson, said that notwithstanding the legislative instruments, the Intergovernmental Relations Framework was not followed. There had been a prioritisation of debtors and SALGA had asked if Treasury could assist SALGA also as they had many municipal debtors. He said that Eskom’s 15 day requirement for payment was a policy matter and that the interest rate when payment was not done, of prime plus 5%, was what was keeping municipalities indebted and needed to be looked at. The culture of non payment by municipalities should not be tolerated but the reality was that there were municipalities that were non viable. The consequences of withholding the equitable share was dire because workers were not getting their salaries. SALGA had sought legal opinion and sent a notice to Treasury that SALGA was declaring a dispute. The manner in which Eskom was acting left much to be desired giving examples of Orlando where prepaid meters had been installed and Soweto where there was an electricity stoppage for ten hours. Hospitals and courts could not run generators for ten hours. SALGA was willing to assist municipalities having trouble in paying but the manner in which the withholding of equitable share was being done was antagonistic.

Ms van Lingen said that every time the Committee met with Eskom and Treasury, Treasury said there was money but it was a question of how it was being used by the municipality. She said municipalities did not want to go via the section 139 route so what was to be done. Whether municipalities used the courts or the Intergovernmental Relations Framework, it did not matter because negotiations had been done previously with errant municipalities but they did not pay off their debts. Kannaland municipality sold water for less than what it was buying it for. Why were some municipalities, as for example in the Western Cape, not debt riddled?

Mr T Motlashuping (ANC; North West) said it was not about political parties’ willingness to be accountable as alluded to by the previous speaker, it was about giving a service to the poorest. He said a meeting had to be convened with the relevant Ministers to reverse the decision to withhold the equitable share as it needed a political decision and the Ministers had to be engaged.

Mr De Beer said the Ministers had to be engaged. A joint meeting comprising the relevant departments and Eskom should be convened to facilitate this. Municipalities should note the FFC’s recommendation calling on municipalities to produce balanced budgets and ring fence their electricity undertakings.

Ms T Motara (ANC; Gauteng) said nobody could agree on the amount of debt owed because different entities were using different billing systems. If municipalities were billed higher amounts then the issue of non payment would not be resolved. She asked Treasury if the withholding of equitable share funds would remedy the problem and what had been done by Treasury over the time prior to the withholding of funds. She asked if reasons for withholding the funds were the same for all municipalities or was each municipality looked at on its own merits. She said that if one party went to court the other party would also go to court.

Mr L Gaehler (UDM; Eastern Cape) asked if the FFC had ever done a study on municipalities with no revenue base and no infrastructure. If not could they do such a study?

Mr Pillay (SALGA) replied that when government did use section 139 it was prescribed by an onerous process. Compared to how this happened, using an administrative action without an obligation on Treasury, raised questions on how the funds were withheld. It could not be that only Treasury decided. He put it to the Committee that the action was ‘escapism’ because the economic conditions were a genuine problem of unaffordability. Treasury would find that ten other creditors would come knocking at its doors seeking assistance with municipal debtors. He knew of one municipality’s operating revenue that was 97% dependant on the equitable share to function. The matter should not be made a political point. If one juxtaposed the poverty pockets and listed the municipalities that had been targeted, one would see that there were valid conditions for non-payment. Municipalities should be assisted in building an economic base to allow them to pay.

Mr Mpho Nawa, SALGA Deputy Chairperson, said that SALGA was present to get clarification on why the equitable share was withheld and to argue why it should not be withheld.

Mr V Mtileni (EFF; Limpopo) asked how long Eskom had been demanding payment by the 15th day instead of 30 days. The Department and SALGA had watched as municipalities had been charged like this. They had not done their homework.

Mr Dondo Mogajane, Treasury COO, said Treasury used the available fora to continually engage with municipalities. On the question of whether their actions had been correct, he referred to the FFC’s presentation (see Background slides) and said that the FFC assumption about what the stoppage was based on was wrong. Treasury’s actions had been misunderstood. He said there had never been a threat from Treasury to transfer the equitable share directly to Eskom. He said the Intergovernmental Relations Framework was one of the best forums to work through and Treasury’s Chief Director on Local Government Budget Analysis, Jan Hattingh, had engaged constantly with stakeholders. Treasury was not insensitive to issues on the ground. It was important to go back to basics and have further engagements. Out of 59 municipalities, 20 came to Treasury to engage and were assisted in their financial management and in understanding their challenges. Some municipalities however did not even bother to call or write showing the amount of their disdain. A fundamental issue that needed to be dealt with was the financial management of municipalities. He was also part of the Eskom war room and there was the challenge of Eskom’s debt. If Eskom defaulted on its debt everybody would be affected. It was thus a balancing act.

Mr Sello Mashaba, Deputy Director: Governance and Intergovernmental Relations, National Treasury, said that since the equitable share had been withheld, R932m had been released to 26 of the affected municipalities.

Mr Khumalo replied that the FFC had conducted a study on municipalities with no revenue base and would make it available to Committee members.

Regarding Mr Mogajane’s comments about the FFC assumption about the withholding. Mr Khumalo said that there were principles to guide one in taking such a decision and in the information to be given to relevant stakeholders of a decision. He said the two Background slides in question did not drive the FFC submission.

The Chairperson said the Committee would consider further engagements at its next meeting.

The meeting was adjourned.