Stoppage of local government equitable share: Financial and Fiscal Commission (FFC) briefing

Standing Committee on Appropriations

29 July 2015
Chairperson: Mr P Mashatile (ANC)
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Meeting Summary

The Committee heard a briefing from the Financial and Fiscal Commission (FFC) on the stoppage of Local Government Equitable Share allocations to certain municipalities with input from National Treasury.

The FFC gave a brief background to the submission and the legal basis for the withdrawal of the Local Government Equitable Share (LES) where temporary disruptions to service delivery were at stake. It then spoke to the debt burden of affected municipalities with special reference to Eskom and the Water Boards.

This was followed by issues of principle important to the FFC as well as to issues of concern, noting that invoking section 216 of the Constitution was a blunt instrument that affected the innocent and the guilty alike.

The FFC then outlined recent developments as of June 2015. 49 municipalities had received their full LES, nine municipalities had received part of their LES and three did not receive their LES. A total of R1.8b had been released. 47 out of 51 municipalities had signed payment agreements with Eskom and 11 out of 14 had signed payment agreements with the Water Boards. The presentation ended with a list of the FFC’s recommendations.

It said that it was encouraging that what municipalities were owed was also being taken into consideration. The biggest debt owed to municipalities was by consumers so there was a lot of work to be done so that consumers paid for the services provided as these services were only viable when the consumer paid for them. A challenge for municipalities was the interest charged by Eskom on outstanding debt. This was a policy issue which needed to be addressed through policy interventions. The FFC was of the view that the Intergovernmental Fiscal Relations Framework and processes needed to be strengthened and welcomed the Treasury’s concrete steps to treat national and provincial departments in the same way as municipalities.

Treasury said that the process with the municipalities had been a build-up which had started in 2009/10 and took time. There was a record of the process and it had been presented to all the Parliamentary Committees. It was very clear that the Committees wanted Treasury to do something about municipal debt. The delay in taking concrete steps to the national and provincial departments was because of the need to go through the processes and to verify the precise numbers regarding debtors and creditors, broken down into commercial and public entities and being further broken down into what was owed for 30/60/90 day periods. This took a long time and the Treasury was in the process of doing the same for the national and provincial departments. When the LES stoppages had been presented to the Presidential Infrastructure Coordination Commission (PICC), both the President and the Deputy President had made it very clear to Ministers to get their houses in order.

Members said that Treasury had acted harshly towards municipalities but not towards national and provincial departments. Members were concerned about whether the withholding of LES was done legally. Why was Treasury being used as Eskom’s debt collection agent? Had municipalities been given the option to make representations to Treasury? Had national and provincial governments helped to assist the management of municipalities? Was the support given to municipalities adequate, as municipalities did not have the capacity national and provincial departments had to manage debt?  Was the whole LES amount withheld or was only the portion owing to Eskom withheld?

Members asked what the names of the municipalities were that did not receive the full amount of LES or received none at all. What was the situation regarding those municipalities that did not sign payment agreements with Eskom or the Water Boards? What follow ups were made to municipalities who had not received any monies? Members asked whether the processes regarding stoppages of the LES were adhered to. Why were national and provincial monies not withheld also? Members said stoppage of the LES was affecting service delivery and therefore withholding of funds should be a last resort. Members asked whether processes were being followed up. Members wanted clarity on whether Parliament gave the decision to go ahead with the stoppage. Was a Cabinet Minister consulted before the decision was taken? Why were national departments not deprived of funds before stopping funds to municipalities? Were the stoppages effective or was it futile as too many people were adversely affected?

Members asked what the other leakages were in the intergovernmental fiscal relations, regarding financial accountability, which lead to spheres of government owing each other money. Members questioned why the debt to Eskom and the Water Boards continued even when municipalities were under provincial administration. Who was responsible for the LES stoppages when municipalities were under administration by a national or provincial department? How do national and provincial chief financial officers explain the nonpayments?

Treasury emphasized that the objectives of the stoppage of the LES was not credit collection it was about addressing the culture of non-payment and of understanding why municipalities were not paying creditors.

Treasury gave a commitment that the process would be done to provincial and national departments too.

The 6 July instalment of the new financial year was released and that the two municipalities had been given money so that processes could continue. 

Meeting report

Briefing by Financial and Fiscal Commission (FFC)

Mr Bongani Khumalo, Acting Chief Executive Officer (CEO), Financial and Fiscal Commission (FFC), gave a brief background to the submission and the legal basis for the withdrawal of the Local Government Equitable Share (LES) where temporary disruptions to service delivery were at stake before handing over to Mr Mkhululi Ncube, Program Manager for Local Government, FFC, who spoke to the debt burden of municipalities with special reference to Eskom and the Water Boards.

Mr Ncube said on average the LES accounted for between 31% and 37% of the operating revenue of the affected municipalities, with Mopani district municipality reaching 97% of its operating revenue. He then spoke to issues of principle important to the FFC as well as to issues of concern, noting that invoking section 216 of the Constitution was a blunt instrument that affected the innocent and the guilty alike.

He queried who was responsible for LES stoppages where municipalities had been under administration. Another matter of concern was that some municipalities had signed agreements with Eskom or the Water Board but had not honoured the agreements. He then spoke to what was owed to municipalities by provincial and national departments.  As of 30 June 2015, 49 municipalities had received their full LES, nine municipalities had received part of their LES and three did not receive their LES. A total of R1.8b had been released. 47 out of 51 municipalities had signed payment agreements with Eskom and 11 out of 14 had signed payment agreements with the Water Boards. A list of outstanding balances of municipalities was supplied. Treasury was applying pressure to provinces and national departments that owed money to municipalities to pay these outstanding monies.

The FFC’s recommendations were:

  • That a proper diagnostic of the root causes of non-payment be done with appropriate consequences if it was due to bad management
  • That municipalities produce balanced budgets and that electricity and water undertakings be ring-fenced
  • That intergovernmental fiscal relations (IGFR) forums find lasting solutions to local government (LG) debt problems
  • That executives of relevant entities (e.g. Eskom, Water Boards) implement appropriate credit controls
  • The FFC encouraged that a LES stoppage only be implemented as a last resort after proper diagnosis of the problem
  • That Treasury should continue to exert pressure and ensure that all national and provincial departments adhered to the Public Finance Management Act (PFMA) regarding the 30 day payment rule to creditors
  • That the Task Team on Intergovernmental Debt speedily conclude its work.

Mr Khumalo said it was encouraging that what municipalities were owed was also being taken into consideration. He said the biggest debt owed to municipalities was owed by consumers so there was a lot of work to be done so that consumers paid for the services provided. These services were only viable when the consumer paid for them. A challenge for municipalities was the interest charged by Eskom on outstanding debt. This was a policy issue which needed to be addressed through policy interventions. The FFC was of the view that the Intergovernmental Fiscal Relations Framework and processes needed to be strengthened and welcomed the Treasury’s concrete steps to treat national and provincial departments in the same way as municipalities. He said it was important when steps were being taken against entities and that measures were taken to protect the vulnerable.

The Chairperson asked what concrete steps had been taken.       

Mr Khumalo said that departments had received letters clearly stating that they had to pay outstanding monies and to pay within 30 days.

The Chairperson said this sounded like a warning letter.

Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, Treasury, said that the process with the municipalities had been a build-up which had started in 2009/10 and took time. There was a record of the process and it had been presented to the Parliamentary Committees. It was very clear that the Committees wanted Treasury to do something.

The delay in taking concrete steps to the national and provincial departments was because of the need to go through the processes and to verify the precise numbers regarding municipal debtors and creditors, broken down into commercial and public entities and being further broken down into what was owed for 30/60/90 day periods. This took a long time and the Treasury was now busy doing the same for the national and provincial departments. To date Treasury did not have perfect numbers but were using audited numbers.

In the provincial context, Treasury could act exactly as it had acted with municipalities. National departments however were slightly different and money was released monthly from an appropriations budget and it was at this point where money was drawn from the exchequer where money could be withheld from national departments. These options were being explored as this was not a simple exercise and processes had to be followed. He added that when this had been presented to the Presidential Infrastructure Coordination Commission (PICC), both the President and the Deputy President had made it very clear to Ministers to get their houses in order. Practically it could be done but legal processes had to be followed so that they could not be challenged on legal grounds.

The Chairperson said the point he was making was that Treasury had acted harshly towards municipalities but not towards national and provincial departments.

Discussion 

Mr M Figg (DA) said his concern was whether the withholding of LES was done legally and it appeared in his view to have been done to bail out Eskom. Why was Treasury being used as Eskom’s debt collection agent? Section 216 (1) said Treasury had to prescribe measures within each sphere of government to maintain control. Section 216 (2) said it may stop funds for serious or persistent breaches of 216(1). Had municipalities been given the option to make representations to Treasury? Ultimately the people were suffering from interruptions to service delivery and there should be another way to deal with the matter. Had national and provincial governments helped to assist the management of municipalities? Section 154(1) of the Constitution prescribed that support had to be given first before money could be stopped. Was the support given to municipalities adequate, as municipalities did not have the capacity national and provincial departments had to manage debt?  Was the whole LES amount withheld or was only the portion owing to Eskom withheld?

Ms M Manana (ANC) asked what the names of the municipalities were that did not receive the full amount of LES or received none at all. What was the situation regarding those municipalities that did not sign payment agreements with Eskom or the Water Boards? What follow ups were made to municipalities who had not received any monies?

Ms C Madllopha (ANC) asked whether the processes regarding stoppages of the LES were adhered to. It should not only be the municipalities that had to be accountable for failing to comply, it should also be departments such as the Department of Cooperative Governance and Traditional Affairs (COGTA). She concurred with the FFC that all spheres should be treated the same. Why were national and provincial monies not withheld also? The stoppage of the LES was affecting service delivery and therefore withholding of funds should be a last resort. She asked whether processes were being followed up.

Mr A McLoughlin (DA) wanted clarity on whether Parliament gave the decision to go ahead with the stoppage. He asked whether a Cabinet Minister was consulted before the decision was taken. Section 216 of the Constitution said that the measures had to be applied across all spheres of government but had only been implemented at municipal level. Why were national departments not deprived of funds before stopping funds to municipalities? The previous FFC submission in April gave the impression that it was not in favour of the stoppages. Were the stoppages effective or was it futile as too many people were adversely affected?

Mr N Gcwabaza (ANC) asked what the other leakages were in the IGFR, regarding financial accountability, which lead to spheres of government owing each other money. Money was going from a national level to the provinces and municipalities, but accountability back to national departments appeared problematic. He questioned why the debt to Eskom and the Water Boards continued even when municipalities were under provincial administration. Who was responsible for the LES stoppages when municipalities were under administration by a national or provincial department? How did national and provincial Chief Financial Officers explain the non-payments? The slides pointed out low income households that did not pay for services but it would be interesting to know the amount of households that had the ability to pay that did not pay for municipalities services.

Regarding Mr Figg’s question on whether the LES stoppage was a way of bailing out Eskom from the financial challenges it faced, Mr Khumalo replied that the FFC could see that if Eskom did not get its money it would have to get support from the fiscus so there was a grain of truth to this. Whether the means justified the ends however was another story. If the fiscus had to support Eskom then there would be less money available for the LES and either way municipalities would then also be affected. The FFC had also asked itself the quesion whether the Treasury was acting as Eskom’s debt collector. Treasury’s interest in Eskom and the Water Boards were in all probability because electricity and water were basic services that were being subsidised for the poor through the LES and if municipalities were not paying Eskom and the Water Boards, then where was that portion of the money being spent?

Mr Khumalo said that the reason why some municipalities were not paying was because they were not even budgeting to pay Eskom.

Regarding the issue of payment within 30 days, he said it was serious and persistent non-payment that was being referred to. The payment norms and standards were all in the PFMA and was the Member of the Executive Council’s (MEC’s) responsibility.

Regarding leakages, he said one of the biggest challenges was that the accountability framework was not being followed and consequences were not brought to bear on officials.

Regarding Mr Figg’s question on whether it was the full or only part of the LES that was withheld, he said it was the full LES.

On the question whether municipalities were getting support to manage their affairs, he said the national and provincial departments of Treasury had established dedicated sections supporting municipalities.

Regarding Ms Madlophu’s question on processes, he said the FFC, as a stakeholder in the Division of Revenue Act (DORA), needed to be consulted on anything dealing with DORA. It had only entered at a late stage especially regarding the decision to withhold funds and only because a former FFC Commissioner had alerted them.

Regarding Eskom’s own credit control, he said Eskom’s instrument was to cut off electricity services and this had been done to a municipality in the Northern Cape three years ago. Unfortunately the impact was that not only those who did not pay suffered, it included those that had paid for their services. There had to be an arrangement where cut-offs did not happen.

Regarding whether the LES stoppages had yielded an appropriate response, he said the numbers appeared to show a positive response by municipalities. This did not include all municipalities, as some of them had not budgeted for Eskom payment agreements they had signed or did not have the wherewithal to honour payments.

Of concern to the FFC was that the interventions were only done to municipalities and not to provinces and national departments. One of the reasons why departments had not paid municipalities was because municipal bills were in dispute. The FFC view was that the interventions should be across the board.

Mr Ncube said that he had the list of names of municipalities who had not signed agreements to pay and this could be forwarded to the Committee.

On the issue of the appointment of provincial administrators, he said the administrator had to be accountable for municipalities’ payments while the municipalities were under his administration.

Mr Hattingh said that the objectives of the stoppage of the LES was not credit collection it was about addressing the culture of non-payment and of understanding why municipalities were not paying creditors. On Eskom and its associated credit rating, he said that if Eskom did not enforce credit control it would be subject to further downgrading by ratings agencies and this would affect the cost of borrowing money to make LES payments. Another objective for Treasury was to initiate the process across all spheres of government and Treasury had followed processes to the letter. There had been consultation with all municipalities and they had records of all interactions generated under section 41 of the Public Finance Management Act (MFMA).

Municipalities were consuming services, but billing only 80% of the value of those services and collecting only 60% of the revenue and this was not sustainable. The overall debt of municipalities was R30b while the Treasury only withheld R2b and only a fraction of the R2b was the Eskom and Water Board monies due.

Through the Select Committee on Appropriations, Treasury would give quarterly feedback on progress made. The monies to 47 municipalities were released in full. Nine had received a portion after giving a full list of its creditors. Two municipalities; Renosterburg and Nathi which were in the Free State, had money released to them to pay Eskom but this had been taken by the South African Revenue Service (SARS) because SARS had privileges under the law.

Treasury would monitor the implementation of signed agreements with 48 out of 51 municipalities that were legitimate, affordable and budgeted for.

Regarding the Water Boards, he said 12 of the 14 affected municipalities had signed agreements.

The poor were not directly affected because people used the services but the municipalities did not pay Eskom and the Water Boards.

LES details from municipalities showed that the LES subsidy was used to fund more households than it was intended for.

Regarding Treasury assistance to municipalities, 85 advisors were placed at municipalities but their experience had been that the moment the officials were withdrawn municipalities could not sustain its capacity and this was a big challenge in the system.

A process was underway regarding the reconciliation of billing.

Regarding the FFC’s recommendations, Treasury said it did not advise a call for a balanced budget but rather called for a funded budget. If a budget was funded then there was a high probability that the budget would succeed.

For the last eight years Treasury had been assisting municipalities to have meaningful budgets. There was a big project to roll out a standard Chart of Accounts within which core services would be ring fenced.

He said that Treasury did not support the view that the poor were the ones not paying.

The Chairperson said that Treasury had engaged with municipalities and and agreements had been signed and that this should be done with national and provincial departments too. He said the FFC could investigate prepaid services.

Mr Hattingh gave a commitment that the process would be done to provincial and national departments.

He said that the 6 July instalment of the new financial year was released and that the two municipalities had been given money so that processes could continue.

The meeting was adjourned

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