2016 Division of Revenue Bill: South African Local Government Association comments & input from National Treasury

Meeting report

Legality of the meeting
Mr D Maynier (Shadow Minister of Finance, DA) took issue with the agenda and legality of the meeting, drawing Members’ attention to the Money Bills Amendment Procedure and Related Matters Act. In Section 9 of the Act, it was said that the Appropriations Committee could only begin work on the Division of Revenue Amendment Bill once the fiscal framework was adopted. The Finance Committee and the Standing Committee on Appropriations were still busy considering the fiscal framework and it was not yet adopted.  As such, the meeting was not consistent with national legislation and the Constitution. Even if that argument were not accepted, the DoRB, the subject of the meeting, had not yet been referred formally to the Committee. The Committee was meeting to consider a bill that was not referred to it. On that basis, the proceedings were also inconsistent with the Constitution and national legislation.

If it were argued that the meeting was taking place in terms of joint rule 159, and that what was being considered was not the DoRB (which has not been referred to the Committee), but rather a draft Bill, that also could not be true as no draft Bill was referred to the Committee. Only a Bill has been tabled in Parliament – there was no draft Bill to precede it. The committee programme for the day stated that the intention was not to focus on a draft DoRB, but rather to focus on the Division of Revenue Amendment Bill.

If the Committee proceeded with considering the Division of Revenue Amendment Bill, then the proceedings were unconstitutional. If it were argued that the Committee was meeting on some other unspecified basis, it raised the question: what was the point of these meetings? Once a Division of Revenue Amendment Bill is formally referred to the Committee, as it would be when the fiscal framework was adopted, then the entire process of National Treasury (NT) briefing, public submission and public meetings by the South Africa Local Government Agency (SALGA) and other interested parties would have to be repeated. So, if the Committee was proceeding under some other unspecified rule, at best it would be not only inconsistent with the Constitution and national legislation, but also inefficient and a waste of expenditure.

Mr Maynier urged the Committee to reconsider its programme and to begin work as required according to the Constitution and the Money Bills Amendment Procedures Act, i.e. when the DoRB was formally referred to the Committee. Members of Parliament could not sit back and allow the rubber-stamping of a R1.4 trillion budget. This happened in the past, and it should not be allowed it to happen again. If necessary, he and the DA woiuld consider taking the matter to the Constitutional Court to interdict the budget process. 

Mr M Figg (DA) added that it was disappointing that no action had been taken since the exact same point was raised in the previous meeting. It was unnecessary and questionable that the Committee hurried formalities ahead in this manner, when there was not sufficient time between the finalisation of the fiscal framework (17 March), the Division of Revenue Bill (12 May) and the Division of Revenue Amendment Bill (1 August). The exact same issue occurred following the last Medium Term Budget Speech (MTBS), making it clear that the Committee was not prioritising the legality of its proceedings. However, he and Mr Maynier [and DA members] remained highly concerned, as they did not wish to partake in illegal proceedings.

Ms S Shope-Sithole (ANC) responded that when times were difficult within a Democracy, decision-makers needed to adapt to the situation. The Committee consisted of Members of Parliament and had the constitutional right to call anybody to come and present to the Committee. The Committee was dealing with an unusually difficult situation in terms of economic growth in the country. She hoped that in future the official opposition would put the interests of the country first instead of politicking for local government.

Dr C Madlopha (ANC) stated that the intention of the meeting was not to rush proceedings but to gather information. As Ms Shope-Sithole mentioned, the Committee has the right to call anybody to assist it in making an informed decision.  In the Committee’s strategic planning meetings late 2015, it was mentioned that one problem the committee faced was getting information at the last minute before a decision needed be made. It was therefore surprising to hear from Members that there was sufficient time for the proceedings - it was contradictory to the conclusions of the and not to take decisions in this meeting.

Ms E Louw (EFF) agreed that the Committee should avoid any proceedings that are against the rule of law. If the purpose of the meeting was purely for information purposes, this should be stipulated in the agenda that is sent out prior to the meeting. Rule 203L was clear about the functions of the Committee, and the agenda should be set in accord. If the timeliness of the information were of such concern, why was the presentation happening only 45 minutes before deliberations were made? If timelines were taken seriously, it was unacceptable that the speaker was late, and also that several ANC members were late.

Mr A Shaik-Emam (NFP) agreed with the ANC members and said that the information sessions had been informative and helpful in preparing Members for decision-making.

The Chairperson appealed to Members not to raise issues already debated in previous meetings, and requested that the meeting be allowed to proceed.

Mr Maynier National Treasury briefing, public submissions, briefing by SALGA - would have to be repeated when the DoRB is formally referred to the Committee. Therefore Members who wanted to continue with these sessions were wasting the Committee’s time.  DA Members were not prepared to take part in proceedings that were not consistent with the Constitution.

The Chairperson said the Committee had already decided to continue these meetings and had received legal advice stating that it was correct to receive such information from stakeholders. The purpose was a briefing; not to take any decisions. The Committee would like to hold more public hearings. It had some submissions thus far, and if these bodies would like to formally participate in public hearings later [after the Bill has been formally referred to the Committee), they would not be barred from doing so. In terms of the rules of Parliament, any committee is allowed to engage on any issues with stakeholders if the purpose is to gain information. He alerted Members that the Bill was already on the Announcements, Tablings and Committee Reports (ATC) of Parliament.  

Ms Shope-Sithole suggested that the Committee invite the state-law advisor to every meeting. Mr Maynier was not a law specialist, and he had advised the committee twice previously where the state lawyers’ decision was later in disagreement. In addition, Mr Maynier was not part of the Committee and was not present in the strategic planning meetings. She questioned whether Mr Maynier had a right to make comments in the Committee, as he was not a member.

The Chairperson reminded Members that any Member of Parliament was allowed to sit in on any of the meetings of the committees.

Dr Madlopha agreed with Ms Louw that it should be clear what the purpose of the meeting is on the agenda. She suggested that the presence of the shadow minister, Mr Maynier, served as a vote of no confidence in the DA Members present at the meeting, it indicated that he did not believe them capable of sufficiently representing the party’s’ concerns.

Mr Figg asserted that the content of the strategic planning meetings in no way suggested that the Committee had ever agreed to proceed in a manner that was unlawful. Things were being done incorrectly and that was wasting Members’ time. He intended to discuss Dr Madlopha’s comments [about Mr Maynier’s presence in the meeting] in private with her. As long as the Bill was in the ATC, a meeting to discuss the Bill and relevant matters cold not be thought of as a briefing. The meeting formed part of the formal process to finalise the budget. It was incorrect to suggest that the meeting was for clarity regarding the Bill – we have the bill to read and can interpret its meaning without requiring input from others. Input from stakeholders was part of the formal process as set out in the Money Bills Act, which defined the mandate of the Committee. It had also been suggested that the meeting was an ‘informal gathering’ or a briefing. If so, it was not Member’s responsibility to attend, and did not fall inside the Committees’ role.

Mr A McLaughlin (DA) took offence to the comment that DA members were trying to be intimidating. The concern raised was a serious one.  It was unbecoming to suggest that this was an electioneering strategy. The DA had never agreed to bypass the rules and the legislation in place to govern the work of the Committee. The Committee was currently in the period between the tabling of the budget and the signing off of the fiscal framework. After that was complete, the committee could start to consider the DoRB – which was the official process that we are legally obliged to follow. The Shadow Minister of Finance was entitled to attend meetings that were within the department of finance; his presence reflected how seriously the DA considered the matter and did not construe a vote of no confidence.

The Chairperson repeated that the Committee would not perform illegal actions, and that the meeting was not illegal.  He agreed with other ANC Members that the Committee was allowed to call any stakeholders and convene and deliberate on matters that were relevant. Mr Maynier was reading illegalities that did not exist. No decisions were going to be made, and the formal public hearings would still take place.

Mr McLaughlin noted the DA's objection to the process and excused the party from the meeting.

DA members then left the meeting in a boycott. 

Briefing by the South African Local Government Association (SALGA)
Mr Dzengwa presented SALGA’s perspective on the budget and the DoRB. He apologised for the absence of several members of SALGA, who had intended to come, but were unable to when the date of the meeting was changed.

The DoRB was presented against a backdrop of a challenging economic outlook for the country, declining GDP projections and increasing fiscal pressures. This reality had both immediate and medium-term implications for the fiscus and for addressing the country’s socio-economic needs and development imperatives. The need for the balancing of competing priorities whilst providing for the basics implied the need for adjustments by all spheres, better management of limited resources, increased accountability and innovation in finding alternative solutions and ways of delivering services.

SALGA participated in the processes to craft the DoRB and the budget, and participated in the two budget forums held in June and September. SALGA also participated in January when a special budget forum was convened to further present the latest fiscal outlook and proposals in terms of allocations to be made to various parties. SALGA met constantly with various bodies such as the Treasury and the Financial and Fiscal Commission (FFC) to clarify various issues. Although it do not always agree to everything, the parties were collectively moving towards resolution.

The upcoming financial period was likely to entail greater pressure on the budget, in particular due to the drought, the zero-increase in higher education fees, and the funding of new health reforms. Coupled to that were pressures on local government arising from migration to urban centres, demands for services, the inability of those who demand services to pay for them, and the infrastructural implications of migration into the cities. These factors implied that government would need to increasingly account for the effectiveness and consequences of government spending.

The allocations for local governments presented in the DoRB generally indicated a decline from what was initially presented in the MTBPS. Projections indicated a decline over the medium-term of 0.6% in year one, 1% in year two, and 1.8% in year three. This translated to a reduction of R300 million in 2016, 500 Million in 2017/18, and R1 billion in 2019. The treasury also indicated that there might be further reductions.

SALGA maintained that this will have a serious impact on the allocations to poor and rural municipalities, who were unable to sufficiently raise their own funds. SALGA acknowledged that the current equitable share formula prioritised these areas, and that despite reductions these areas were probably still better off than under the old formula (pre-2013). SALGA was also pleased that the DoRB guaranteed 95% of the indicative allocations of the Medium Term Expenditure Framework (MTEF), and the Institutional and Community Services component of the Local Government Equitable Share (LGES) was also protected in that it cannot be reduced by more than 5% in 2016/17.

The SALGA and FCC study into the costs of service provision contained important findings. In 2015/2016, the costs of the basket of services being provided by municipalities were rising faster than the increase in allocations. For example, the cost of Free Basic Services had grown by 6.8% while the total equitable share had only grown by 4.6% (after reductions).   Another example is the rise in electricity costs by 9.2%, as quoted by the National Energy Regulator (NERSA), an issue that must be raised with Treasury.

Since 2015, allocations on conditional grants had been declining, reducing by R4.9 billion over the MTEF period.  The grants review exercise produced several recommendations, such as the merging of water and sanitation grants, the discontinuation of certain grants, and the provision of new grants around maintenance, refurbishment, and asset management. There were new grants aimed to target infrastructural development within the metros. Overall, SALGA supported and trusted the grants mechanism.

SALGA was worried about the decline in the Municipal Systems Improvement Grant (MSIG), which was reduced from R251 million to R84 million in 2016/17. This raised serious concerns about how municipalities would be able to afford the reformed outcomes provided in the new DoRB, reforms which SALGA originally did support. The new DoRB also failed to indicate that funding would be provided for the implementation of Municipal Regulations on a Standard Chart of Accounts (MSCOA).  With respect to the DoRB, the Municipal Demarcation Grant of R297 million was far less than had been projected, and may be insufficient.

There was a provision for a once-off gratuity for outgoing councillors, which is currently allocated at R309 million. SALGA is busy working with the Department of Cooperative Governance and Traditional Affairs (COGTA) and NT to find a formula for the allocation of that amount to the councillors. There was a process to deal with unfunded and under funded mandates that were agreed upon and driven by COGTA. This process needed to create an improved framework for the allocations of Fiscal Powers and Functions Bill to various municipalities. SALGA hoped that through this process the issues of unfunded or under funded mandates would be resolved. 

The Minister called for cost containment measures, and SALGA supported that. There needs to be a regulation that accompanies the circular going to municipalities [the circular indicating the cost containment measures]. SALGA need to be involved in the crafting in the circular, so that it did not impose impossible requirements on municipalities. Depending on what the circular ended up detailing, it may pass a resolution at the National Members Assembly in May, that municipalities must adopt the cost containment measures.

SALGA previously suggested including certain measures in the Local Government Fiscal Powers and Borrowings Act. These included the introduction of a Local Business Tax, and the funding of municipal roads through a vehicle license fee, and SALGA expects the committee to assist in passing these resolutions. SALGA was discussing alternative forms of revenue raising and funding with several bodies. One such instrument being considered was Pool Financing between and amongst stronger municipalities. Another issue was the legal and legislative implications around the use of the Equitable Share as an instrument to leverage the borrowing capacity of municipalities.

Currently municipalities were owed about R115 billion. It was a worry that much of this debt may become uncollectable. It was also of concern as to what effect such excessive debt would have on municipalities’ credit ratings.  SALGA therefore suggested the creation of a National Collections Agency.

SALGA was concerned of the potential withholding of the equitable share allocation to municipalities. It had been informed that municipalities owing to Eskom or the Water Board might not receive their allocations. This was an issue, especially as in a number of instances; SALGA had found that accused municipalities actually had been paying their Eskom accounts. In other cases, there were often valid reasons as to why the municipality was unable to meet its obligations, yet these reasons were not considered when Section 216 was invoked.  SALGA felt that more attention should be paid to make sure that Eskom cleaned up its act and engaged in tenable business practices, which would reduce the costs to municipalities.

SALGA would like the committee to pay attention to and monitor the issues raised. Some of these issues may be resolved in the Members Assembly in May; whatever comes out of this session will be presented at the next budget forum.

Discussion
Mr Shaik-Emam commented that local government had tended to fail us in the past. He therefore wanted to know what SALGA’s strategy would be to ensure that municipalities were performing and that grants were used efficiently to achieve goals. In terms of the writing off debts by municipalities - what role did SALGA play there? He agreed that there is a challenge with regards to the prescription period, which was three years. He also mentioned the In Duplum law, which stated that the interest payments charged on a loan could never exceed the capital amount. He believed that SALGA had a good argument in that interest amounts charged by Eskom may be too high.

It was Mr Shaik-Emam’s opinion that there were already too many challenges to motorists and small businesses to consider placing extra taxes on them. This was especially true for small businesses with fine profit margins, given the economic climate. He also wanted to know what effect the reduction in equitable share for local governments would have.

Mr Shaik-Emam noted that at present it was possible that the prescription period of a debt could disappear. This was possible because the debt must be paid by whoever owned the property the debt was for, yet the ownership of the property could change hands. Unscrupulous landlords may thus be able to take advantage of this system. What role would SALGA play to ensure the interests of the people?

In terms of what the President and the Minister of Finance said, what was SALGA willing to do from now on to ensure that there was compliance in all our municipalities? Finally, in terms of service delivery government was a big supplier, and our services should therefore be cheap. What could SALGA do to limit the ability of SOE’s and government departments to make excessive profits?

Ms Louw drew attention to the bullet point of the slide show that read “Lobby for increased funding for local government”. In her view, it should also state that local government should get majority of the national budget. This was because the people live in the municipalities, and in order to give them proper services, municipalities need resources. But even if funding to local government increased, how would SALGA improve the accountability of the spending of these resources, which was already an issue SALGA is facing? She condemned SALGA’s lack of action to address under spending municipalities .If the accounting system of SALGA faced cash flow and credit control issues, SALGA would need to create a plan to address these problems. In some cases, it was found that municipalities had not been sufficiently billing debtors. She wanted to know who it was that refused to sign service delivery agreements, as mentioned on slide 16.

Ms Madlopha sought a clearer understanding of the National Collection Agency proposal. Credit control policy had been raised as a challenge around the issue of implementation.  She wanted to know if SALGA had met Eskom for discussion, seeing as they had complained about Eskom’s refusal to sign Service Delivery Agreements, and other matters.  There were 27 municipalities that still owed Eskom money – what was SALGA’s role in ensuring that they paid their debts? Parliament encouraged SALGA to take a more involved role in the oversight of municipalities. If there was under-expenditure in infrastructure spending, which was crucial for economic growth, what would SALGA do to make sure that the grant was spent appropriately? The same applied to spending on basic needs.

SALGA indicated that it was lobbying for increased funding for local government.  How was SALGA ensuring that it had the capacity to spend additional money to achieve its aims? In the presentation, SALGA supported cost containment measures. Municipalities needed to have their own regulation to achieve cost containment measures. It was a problem that they could continue as they like if they did not create such regulations. SALGA flagged the need to raise additional revenue in local government, but did not suggest when and how this would be done. Similarly, SALGA mentioned the need to create a legal basis for the equitable share to increase; how would this be achieved. It was also indicated that people owe municipalities more than R115 billion; who were these people?  The presentation indicated that Eskom was billing some of the municipalities R5 million, yet it was only collecting R1.5 million.  She asked for clarification and what is to be done? 

The Chairperson raised concern about the illegal connection of water and electricity putting pressure on budgets. Rural influx and population increase from foreign nationals had put further strain on resources.  Overcrowding was putting pressure on land and health issues – the issue was more complicated than just illegal connection. The equitable share and the additional grants could not be enough to address social issues – local government must come up with its own solutions, including modern revenue collection methods. Small enterprise development would receive additional funding given the budget speech. SALGA needed an effort to build and monitor these informal and small businesses to improve revenues.

Ms Madlopha said that it would be useful for SALGA to specify how much other government departments owed it. It should monitor carefully at a local government level, to make sure that that costs were contained and that government money was managed efficiently. SALGA needed to address the issue of capacity at a local level, especially through training.

Mr Shaik-Emam wanted to have a breakdown of the R115 billion debt owed to municipalities. He also considered the possibility of a National Revenue Policy – a revenue policy for the entire country. He suggested a national policy in place so that all municipalities paid according to the same scheme. It was better to have many people repaying at least a small amount of their debt, so that the revenue was at least coming in. He also suggested a system that identified bad debtors, and helped them through pre-paid meters or a similar scheme? They could concurrently pay a small amount towards their debt. In this way they could rather learn to control their use of utilities so as to avoid incurring further debt.

Mr Dzengwa responded that the performance of local government related to the capacity issues discussed. SALGA had always been clear that building capacity was an ongoing exercise. An unfortunate reality was that with every round of elections, more than 50% of councillors in municipalities were new to the system. The cycle then had to start over again, placing new councillors in the municipalities and portfolios. Depending on the calibre of the individual, capacity building may often take a step backwards. Treasury reported that from 6 months before and up to 18 months after elections, the municipal system was instable as it accepted new councillors. SALGA was working with various other bodies to build the requisite skills in local government. Another problem with service delivery and capacity was the tender system; when an unsuccessful tender took the matter to court, the project in question could be delayed for up to three years.

SALGA was focused on creating resilient institutions, so that good performance did not depend so much on these individuals. This is to ensure that capacity is not only at a higher-level, but existed through the organisation.  SALGA implemented the Municipal Audit Support Programme, which had increased the rate of clean audits. Reports indicated that cleaner audits were correlated with better resource usage and performance in those municipalities. Another exciting development was that 50% of municipalities had implemented consequence management arrangement processes for if the municipality over-spends. This was a positive step for accountability.

The issue of writing-off debts was a complex one; sometimes debt was written off and then arose again very quickly. The Free State and Mpumalanga were two provinces wherein this was a major problem. SALGA had more than five meetings with Eskom within the provinces to try and address these problems. SALGA also met with the 27 municipalities including the six that were defaulting. It raised the issues brought up in Parliament with many relevant bodies such as: COGTA, National Treasury, and the Department of Public Enterprises. SALGA found several reasons for indebted municipalities. One of these was the fact that Eskom seemed to bill these municipalities for far more than the cost of the electricity provided, and that Eskom refused to sign Service Delivery Agreements, as it was not required by law. Another problem was that SALGA had no legal basis to enforce credit controls. 16 municipalities had their equitable share withheld as they were said to owe Eskom R4.2 billion. Soweto alone owed Eskom R8.2 billion, and yet there is no cutting of their services. Electricity is the only instrument we have to compel debtors to pay, as we cannot cut off essential services.

The set up of our country is that certain areas entirely depended on transfers; they did not have balance sheets and ways to source funding. Those areas were badly affected when equitable shares were reduced. Local government only received about 9% of the total budget at present, which was insufficient regardless of capacity. Metros agreed to pledge more to bail out smaller municipalities but this has not been implemented. SALGA expect to increase accountability while receiving more funding; and fully support financial misconduct regulations.  

Regarding the debt of landowners, this fell under section 118 of the Local Government: Municipal Systems Act. Municipalities have looked this, and decided that the arrangement was unfair when a new owner is obliged to repay debt incurred by a previous owner. This was the motive of issuing clearance certificates, and so long as these are legally questionable, we require legislative adjustment.

There was ongoing discussion between SALGA and the chief procurement office regarding the setting of prices as municipal suppliers. Local governments need to be added to the supplier’s database so that their prices could be regulated.

SALGA performed a study on the debt owed to municipalities and the billing system of municipalities. It found three categories of defaulters: households, businesses, and government. At least at the government level, action must be taken. Cabinet agreed upon this matter – that government departments should pay at least 80% of their debts to municipalities. Businesses should also be paying; SALGA requested that higher levels of government enforce credit control measures to get money from indebted businesses. It might be necessary to introduce new legislature; for instance, a business must have a certificate validating their debt-status before they were able to transact with the municipality. This principle should be extended to all government workers; if they received a salary, they should pay their debts to government.

The National Collection Agency concept was borrowed from the model implemented in France. SARS had a database containing information of individuals or bodies that were opening servicing other accounts while ignoring debts to municipalities. This was information that should be shared with SALGA to assist in debt collection. A National Revenue collection policy is also something worth considering. However, SALGA has found that issues are often more to do with implementation than with the quality of the policies themselves.

The problem with the circular is that it was not legally binding. Regulations were binding, which was why SALGA needed to move from a circular for cost containment to legislation for cost containment. Treasury indicated that it would issue the circular seven days after the tabling of the budget.

Comment from National Treasury
Ms Fanoe stated that NT was aware of NERSA’s announcement the previous day, and it would be considered as part of the 2016 budget adjustment process.  The Municipal Systems Improvement Grant had existed for a number of years with the intention of building capacity, but it did not really have the impact that was intended. This was why the grant had been restructured; support was now directly linked to the Municipal Infrastructure Support Agency, in order to assist municipalities to access and spend infrastructure support money. In addition, there had been various other reforms to the support.

The MSCOA had always been funded through two grants, and it will still be funded through the Financial Management Grant. So it would still be supported. The conditional grant money and the equitable shares were funded through the Division of Revenue Bill. However, there was other legislation important to note. Much of SALGA’s presentation related to municipal borrowing, procedures which fell under the Municipal Finance Management Act. National Treasury was looking at processes to strengthen municipal borrowing. New taxation policies that SALGA wants to introduce must be done through the Municipal Fiscal Powers and Functions Act.

The March 2016 equitable share for local governments would not be withheld. Eskom was already taking legal action against some of the defaulting municipalities. The division of revenue and equitable share could be used for municipal borrowing – the grant is unconditional and does not required changes to legislation. With regard to the division of revenue and local government equitable share being used for municipal borrowing and leveraging- it did not require changes to the Municipal Finance Management Act (MFMA) nor did it require consideration through the DoRB because it was an unconditional grant. When taking on debt, however, affordability is incredibly important.

SALGA made a proposal that the cost of basic services was key in informing future allocations. This was correct, but funding was also subject to the national budget process and affordability. 

Final Comments from Members
Ms Madlopha suggested that Members that boycott a meeting should not be allowed to take the official documents with them.

Ms Louw disagreed stating that the information was public and that any Member of Parliament was allowed to request official documents used in committee meetings.

Ms Madlopha responded that Members were inconsistent, if they claimed that receiving the information in the meeting was illegal, but then they took documents containing that information. 

The Chairperson reminded Members that Parliament cannot withhold any information from Members, and that the public and Members would therefore have access to it anyway.

Discussion of previous meetings’ minutes (16, 17, 25, and 26 February)
Minutes of the 16 February were corrected to indicate the absence of Ms R Nyalungu (ANC) and to include the apology received from Ms Shope-Sithole.

Minutes of the 17 February were corrected to include the apologies received from Mr Shaik-Emam and Ms Nyalungu.

Minutes of 25 February were corrected to include the apology received from Ms Shope-Sithole.

Minutes of 26 February were corrected to include the apologies received from Mr McLaughlin and Ms Louw, and to reflect the presence of Mr Maynier in the meeting.

The minutes from all four meetings were adopted and the meeting adjourned.