Division of Revenue Bill: Financial and Fiscal Commission briefing

Meeting report

The meeting started with introductions by members of Parliament (MPs). Apologies for late coming and absence at the meeting were sent in by Ms G Manopole (ANC; Northern Cape) and Ms T Wana (ANC; Eastern Cape) respectively.

Briefing by Financial and Fiscal Commission on 2017/18 Division of Revenue
Dr Mkhululi Ncube, Program Manager: Local Government Unit, FFC, noted that the submission was made in terms of key instruments, such as the Constitution, the Intergovernmental Fiscal Relations (IGFR) Act and the Money Bills Amendment Procedure and Related Matters Act (MBAPRM). The focus of the 2017/18 submission was on rural development in South Africa. The submission was aimed at providing a comprehensive review of the IGFR instruments and reform strategies that would lead to better effectiveness of these instruments on rural development.
The context of the submission focused on low economic growth mainly because rural areas were found to be marginalized in such areas.

Research showed that rural areas comprised of a key sector of society that was characterized by a changing phase. In 1911, 82% of the population resided in rural areas while only 30% of the population resided in rural areas as at 2013. The implication of this was the high level of migration from rural areas to urban areas. It was for this reason that FFC determined to focus on IGFR instruments to develop rural areas. The effect of migration on rural areas included the existence of aging population, decline in economic growth, poverty, and unemployment.

There was no common definition and understanding of what rural areas were and largely constituted, existed. The absence of a common definition for ‘rural areas’ affected the deployment of interventions to these areas. In a bid to define rural areas, the FFC considered the concept of rural economic development, which was focused on the improvement of the general wellbeing of rural people and spaces. Strategies to promote rural economic development were noted (see slide 5 of the attached document). However, FFC addressed the definition of ‘rural’ through the use of municipalities in the B3 and B4 categories, and rural districts (see slide 5 of the attached document for details). If two-thirds of a municipality was rural, it would be regarded as a rural district. From this definition, Eastern Cape, KwaZulu-Natal (KZN) and Limpopo provinces constituted the main rural provinces.

FFC acknowledged that although agriculture was the engine of growth within rural areas, rural development was more than agriculture and the rural economy was no longer solely a farm economy. A multi-sectorial policy approach was therefore developed to harness both agriculture and non-farm activities in rural areas.

Recommendations proffered on the issue of rural development included the need for government to develop a comprehensive definition of ‘rural areas’ and rural development, and apply such definition across the three spheres of government. The Department of Rural development and Land Reform (DRDLR) and the Department of Planning, Monitoring and Evaluation (DPME) should convene a task team in conjunction with other relevant government departments to develop a clear and concise definition of rural, remote and rural development. Government should deal with disparities within and between regions by harnessing the growth potential of rural areas, and also strengthen intergovernmental relations.

Issues surrounding the financing of rural local municipalities for rural development were informed by government’s decision to amalgamate some municipalities in 2015. Part of those amalgamations was driven by government’s intention to minimise grant dependence on transfers, as reiterated in the proposal submitted by the Cooperative Governance and Traditional Affairs (CoGTA) to the NDP. CoGTA also proposed that some municipalities should be amalgamated for the purpose of correcting their dysfunctionalities. Based on these proposals, the FFC sought to find out if it was possible for some municipalities to be non-dependent on grants, and whether the use of an instrument of demarcation would correct dysfunctionality in municipalities.

Key findings in this regard however, revealed that quite a number of rural municipalities would remain transfer dependent, and this may pose a challenge in achieving a complete elimination of grant dependency. It was also found that it was impossible to correct dysfunctional municipalities through amalgamation instruments. Instead, corrections could be made through some polices or regulations.
Instruments that could be used to fund some municipalities were identified. They included ‘user fees’ for social amenities such as parks and community halls, as well as ‘hotel fees’ in areas with vibrant tourism.

It was recommended that national and provincial departments of CoGTA should assist rural municipalities in ensuring that they have property registers and valuation rolls in rural areas, and that such registers are up-to-date. CoGTA should note that some municipalities by nature, would never be self-funding, and so, demarcation processes should go beyond financial viability. Instead, CoGTA should seek to achieve financial viability in municipalities by increasing or developing tax bases through economic development.
It was also recommended that CoGTA should amend the Municipal Demarcation Act to ensure that the full impact of demarcations was properly analysed and understood before such demarcations took place; seek to correct dysfunctionality through legislative, policy and capacity-building measures rather than through amalgamations; and monitor the success of mergers, as well as the actual cost of such mergers.
It was recommended that National Treasury should continue to consolidate grants, as consideration of grants in isolation could give an impression that some services were underfunded even when such services were fully or overfunded. The National Treasury should also ensure that the local government equitable share (LGES) and conditional grants were informed by objectively derived cost estimates.

In terms of effectiveness of transfers to local and district municipalities for rural development, it was discovered that rural municipalities were less efficient at providing basic services than district municipalities; some local municipalities had increased their output by 60% without additional resources, reflecting inefficiencies in such municipalities; some districts no longer performed their legislative functions to the full; and districts were more relevant in rural areas than urban areas.

National Treasury was advised to introduce more stringent expenditure supervision for grants to municipalities as part of its underlying principles, in order to minimize wastage and improve efficiency.
CoGTA should stipulate the role to be played by urban district municipalities, with the aim of introducing a single-tier local government system in urban area, while also strengthening a two-tier local government system in rural areas.
It was important for CoGTA to provide clarity on the functions and powers of district municipalities. FFC opined that the powers and functions of district municipalities should cover areas such as district-wide planning, coordination of strategic development and intergovernmental policy issues, provision of technical assistance to local municipalities, provision of district-wide services, as well as provision of bulk water, sanitation, refuse removal and services to district management areas.

With regards to the issues around farm evictions and increasing responsibilities of rural local municipalities, it was noted that local municipalities increasingly had to deal with the effect of influx of farm evictees into rural towns, such as shelter, services and consequences of unemployment. This was further supported by a recent Constitutional court ruling that firmly placed the challenge of migrations as a responsibility for local municipalities to handle. It had however, been discovered that IGFR instruments have not responded to this problem, thereby assisting municipalities.

In terms of highlighting the cost implications of farm evictions on local municipalities, it was noted that Breede Valley Municipality in the Western Cape incurred a cost of R4 million from dealing with farm evictions, an amount that was not budgeted for.

It was recommended that the current municipal disaster grant should be allowed to cater for eviction-related emergencies. The approach through which municipalities accessed this grant should be the same approach applicable for farm eviction incidences.
It was also recommended that government should strengthen the coordination and implementation of existing programmes targeted at displaced farm workers and dwellers, such as the inclusion of farm evictees among the beneficiaries for housing in rural towns, granting them access to land, and centralizing the reporting of evictions to improve data collection.
Government Departments that should be involved in coordinating and implementing programmes include DRDLR; Department of Agriculture, Fisheries and Forestry (DAFF); Department of Home Affairs (DHA); Department of Human Settlements (DHS); CoGTA; Department of Social Development (DSD); South African Police Services (SAPS); and municipalities.

In terms of the issues around the review of effective sanitation fiscal instruments and governance that would enhance rural areas, it was pointed out that sanitation backlog remained high in rural areas despite numerous interventions. Findings showed that sanitation was funded on an ad-hoc basis. The rural household infrastructure grant (RHIG) remained the only key funding source, while the municipal infrastructure grant (MIG) prioritised other infrastructure.

Based on the above findings (see more findings on slide 18 of the attached document), it was recommended that rural municipalities that were water service authorities (WSA) should prioritise delivery of sanitation infrastructure, which should be reflected in the integrated development plans (IDPs) of such municipalities. South African local government association (SALGA) should particularly play an oversight role in ensuring compliance with this recommendation.
In terms of planning and implementing sanitation projects, it was recommended that rural municipalities that were WSAs should explore and prioritise ecological sanitation waterless technologies, where possible.
It was also recommended that National Treasury and Department of Water and Sanitation (DWS) should undertake a comprehensive evaluation on the impact of sanitation grants on rural municipalities before the discontinuance of any such grant. District and rural municipalities that were WSAs should submit compliant business plans to DWS in a timeous manner. Executives who fail to comply would be held accountable. In cases where WSAs were incapacitated, the DWS at both national and provincial levels should intervene and provide capacity.

Discussion
Mr D Ximbi (ANC; Western Cape) asked if a strong team had been put in place to monitor the grants allocated to municipalities in order to ensure that such grants serve the purpose for which they were allocated.

Ms B Engelbrecht (DA; Gauteng) asked if any of the amalgamated municipalities were actually working.

Mr M Khawula (IFP; KwaZulu-Natal) referred to the FFC’s recommendation for rural municipalities to have property registers and valuation rolls, noting that municipalities barely provided any services in rural areas that would warrant charging of rates. He wanted to know what services would warrant charging of rates by municipalities. He also asked for details on grants that were overfunded in rural municipalities; FFC’s stance on the conversion of some urban districts into municipalities; and if FFC looked into the disjunction of departments at national and municipal levels.

Mr S Thobejane (ANC; Limpopo) asked if the FFC had members that resided in rural areas in order to understand the confusion experienced in defining ‘rural areas’ as alluded to in the submission. It was suggested that FFC should consider a review of its priorities to emphasise the fact that rural infrastructure and development could not be compared in passing. Instead, the residents of these rural areas should be enlightened on the matters such as the absence of a linkage between infrastructure development and land ownership.
He further pointed out that the purpose for which local governments were created, which was to bring services closer to the people, was yet to be fulfilled as most local government offices were positioned in previously advantaged locations. In addressing issues of infrastructure development in rural areas, it was important to ensure that local governments were strategically positioned in a manner that allows proximity of services to be provided to poor people.

Dr Ncube replied that the FFC considered the division of revenue and related instruments. It was constrained by legislation to make use of certain instruments only. Nevertheless, the issue of infrastructure remained an important issue to the Commission.

The Chairperson requested for clarity on the legislative constraints facing FFC.

Dr Ncube replied that in terms of the FFC Act, the Commission had a function to advise parliamentarians on the division of revenue. The implication of this function was that FFC may only advise on areas relating to the division of revenue and no other. The Commission would however look at other areas where the division of revenue was concerned, as well as instruments that could be used to develop rural areas. The FFC focused on infrastructure in both rural and urban areas in the previous year’s submission, as it was an important area for economic development. The FFC was looking into the infrastructure backlogs in Eastern Cape Province to know what areas assistance could be offered. It had been agreed that long term measures would be deployed in developing these rural areas.

In responding to the question on the FFC having a strong team to assist with monitoring of grants, it was pointed out that the main stakeholder of the Commission was Parliament. In essence, the Commission reports to the Parliament with the aim of empowering the Parliament with relevant instruments needed for conducting oversight. It was for this reason that submissions were made to the Parliament in terms of the Act. The Commission submitted its recommendations to National Treasury and government department, and such recommendations could be accepted or refused in some cases. The Parliament could then monitor the impact of recommendations proffered by FFC to these government departments.
The Commission however, did its best to engage with government departments, provinces and municipalities on proffered recommendations through various means, including road shows.

With respect to places where amalgamations have worked, it was pointed out that amalgamations started when Tshwane was merged with other municipalities, and paid so much for the amalgamation process. This necessitated FFC’s recommendation for the demarcation grant and a three-year transitional grant to assist municipalities during the amalgamation process. FFC already listed in its submission, municipalities that were likely to perform well after the amalgamation process and those that may not perform well. However, it was of the opinion that a large number of municipalities may not benefit from the amalgamation process due to mergers of well performing municipalities with poor performing municipalities. A more detailed submission had been published on FFC’s website.

On the issue of property rated and valuation rolls in rural areas, the FFC noted that it considered this issue in terms of communal areas. The Commission had also noticed the constraints faced by some municipalities in levying properties in rural areas due to various factors including a weak tax-base. However, it had been suggested that national government departments should assist municipalities with the evaluation of properties, where properties that could be levied existed in such municipalities.

In highlighting overfunded services, the FFC considered the reasonable cost of providing services in municipalities. The transfer of money for provision of services to municipalities were then considered to see if they served the purpose for which they were transferred and whether the money was adequate or not. It was discovered that the consideration of grants in isolation may result in a different conclusion than if many grants were considered together, as the latter option may assist in evaluating the adequacy or inadequacy of these grants for various municipalities. As noted in FFC’s submission, some funding streams of municipalities were currently being looked into.

The FFC was monitoring the issue of conversion of urban districts into municipalities, as well as the implication of taking out strong municipalities from districts, especially since it had an effect on the economies of such districts. The FFC’s submission for the coming year would address in detail, the issue of district municipalities. The FFC was currently working with CoGTA to come up with a defined role that should be played by both rural and urban district municipalities.

In addressing the issue of disjunction of government departments, it was noted that the entire submission made by the FFC spoke to the disjunction noticeable at national, provincial and local levels, which was a result of lack of coordination in the IGFR arena. Quite a number of departments focused on rural but without proper coordination. This necessitated the Commission’s recommendation for a strengthening of coordination amongst departments at all levels. Districts played important roles in coordinating municipalities and ensuring that the same objectives were pursued by these municipalities.

A detailed submission would be made to the Committee to further elaborate the Commission’s involvement and representation in rural areas.

Mr M Chetty (DA; KwaZulu-Natal) said that focus should not be placed on the migration of people from rural to urban areas. Instead, there should be more emphasis on the development of rural areas into self-sufficient places. The submission made by FFC showed that those without privileges in the rural areas were at a disadvantage. It also revealed the absence of an existing policy that would help in achieving self-sufficient rural areas. He noted that difficulty may arise in implementing FFC’s recommendation for government to include farm evictees among the beneficiaries for housing in rural towns.

Mr Chetty sought an explanation on the steps taken by the Commission to rectify the disjunction among various levels of government departments in providing services to the municipalities, as already acknowledged in its submission. It was pointed out that district municipalities were insufficiently funded and could therefore, not afford to maintain their infrastructures.
He also wanted to know how the Commission planned to revitalize businesses in the rural areas through the introduction of the two-tiered local government system in the rural areas.


Ms T Mokwele (EFF; North West) noted that even after 22 years of democracy in South Africa, there was still a lot to be done in developing the lives of marginalised people through the provision of services. Several commissions had been established to investigate and make recommendations, but they have not been provided with the means to transmit relevant information to those in power for implementation. She pointed out that spatial development planning was still carried out through the use of the apartheid system. The apartheid system was also still being used for the distribution of revenue, and this made it difficult for rural areas to gain access to proper infrastructure development. She added that Commissions were expected to make findings and proffer innovative recommendations that could be implemented into legislation.

Ms T Wana (ANC; Eastern Cape) asked if any pilot project had been launched by the current FFC Commissioner during his five-year term. She noted that the Commission’s reference to ‘former homelands’ in defining the concept of rural areas was discriminatory, as it could be linked to the apartheid days. Agricultural projects should therefore, not be linked to any such history.

Mr M Mhlanga (ANC; Mpumalanga) asked for the Commission’s strategies or proposed methods to be used in achieving sustainable economic growth programmes in rural areas; if districts offered any assistance in ensuring the provision of services to people; and what informed the Commission to conclude that Mpumalanga was not part of the rural areas.

The Chairperson noted that SALGA, CoGTA and other municipal demarcations should have been invited to the meeting for proper engagement and clarification of certain issues raised by members.
It was noted that FFC was not a Chapter 9 institution but an institution established in terms of Section 220, Chapter 13 of the Constitution. Its responsibilities did not include addressing deficiencies or challenges.
It was reiterated that no adopted official definition existed for the concept of ‘rural area’. The Commission was asked to clarify the definition it had chosen to make use of.
The formula used for determining the LGES and other revenue allocations had gone through numerous reviews since inception in 2001. Despite these reviews, an appropriate formula was yet to be developed.
The Commission was asked if it took into consideration municipalities without land ownership before proposing the possibility of revenue generation by municipalities through property tax.
In recommending that part of the farm evictions should be addressed through the municipal disaster grant, FFC was asked to clarify where such grant would be sourced from. Explanation was also sought on the basis for which it was concluded that rural municipalities were less efficient than district municipalities in terms of provision of services; and the methodology adopted in carrying out assessment in rural areas since FFC was not located in rural areas.
He also wanted to know what propositions could be given to government to develop growth potentials of rural areas; the effect of evaluation of property rates and taxes in rural areas; and how FFC ensured that it focused on only one area per year.
A further engagement with FFC as a whole and other relevant stakeholders was necessary, in order to address the numerous challenges already raised.

Dr Ncube began his responses to issues raised by reiterating the fact that no standard definition of ‘rural area’ existed, but FFC came up with a working definition for the development of its recommendations. In the Commission’s opinion, a municipality with 67% of B3 and B4 areas was categorised as a rural area.

A commissioner was appointed to the FFC for a term of five years, which was renewable for another term of five years. The Commission itself had been in existence for almost 20 years. The Commission was expected by law to make yearly recommendations to Parliament and government on how equitable the division of revenue was.

Ms Mokwele proposed that the next appearance of FFC to the Committee should be done with the presence of commissioners and researchers, to assist with proper engagement with the Commission.

Dr Ncube said that the purpose of the submission made by FFC was to consider ways by which rural areas could be revitalised through sustainable development and use of IGFR instruments, instead of comparing rural areas to urban areas. The problem of migration from rural to urban areas had been duly noted. The focus for next year would be on urban areas. As emphasised in the previous year, the maintenance of infrastructure in rural areas remained an important issue till date, as most municipalities failed to adequately maintain their infrastructures.

The Commission was aware of the disjunction among government departments at various levels of governments, and had therefore, recommended a strengthening and coordination of intergovernmental relations.

The issue of insufficient funding for infrastructure maintenance was an area the FFC also looked into. National Treasury already prescribed that eight to ten percent of operational budgets must be spent on infrastructure maintenance. A lot of municipalities fell short of this prescription for various reasons asides incapacitation.

The latest LGES formula, which was reviewed in 2012/13 benefited more rural municipalities. Nevertheless, the formula was still imperfect, as it was yet to be properly costed. It had been recommended that the review of the provincial equitable share formula should factor in rurality.

The FFC’s comparison of the efficiency of rural municipalities with district municipalities was a general statement to highlight the inefficiency of local municipalities at the national level. This was not to say that there were no less efficient district municipalities or efficient local municipalities.

In addressing the methodology used by FFC, it was pointed out that FFC comprised of 32 members of staff and seven commissioners. A team of researchers went round municipalities and provinces to gather data, which formed the basis of the Commission’s research and recommendations.

Ms Wana expressed displeasure at the absence of any of the commissioners from FFC, as pertinent issues requiring expert responses were yet to be addressed.

The Chairperson said that technical questions should be addressed by Dr Ncube while political questions should be noted till commissioners were present to answer them.

Ms Mokwele said that FFC was incapacitated to handle the work of over 200 municipalities.

The Chairperson said that FFC should inform the Committee of any challenges it may be facing, including issues relating to shortage of staff.

Mr Thobejane said that the briefing presented by Dr Ncube would assist the Committee in preparing for its next engagement with FFC. He proposed that the Committee adjourned the meeting till a later time when the commissioners would be present to address all pending issues.

Dr Ncube said that he would relay the Committee’s message to FFC.

The Chairperson appreciated FFC’s presentation, and requested that the commissioners should refer to Section 69 of the Constitution, which was to the effect that any person summoned to appear before a Committee of Parliament was expected to do so.

The meeting was adjourned.