Division of Revenue Bill [B4-2017]: SALGA submission; Committee Report on Western Cape oversight & Programme

Meeting report

Introduction by the Chairperson
The Chairperson announced that the SA Local Government Association (SALGA) would brief the Committee on financial implications of the budget. The Committee would also consider its Oversight Report to Saldanha but the main item for the day was the SALGA briefing. Mr Simphiwe Dzengwa, Executive Director: Municipal Finance, SALGA, would lead the Committee through the presentation. Apologies were received from the rest of SALGA, who were attending their national conference. Apologies were also noted on behalf of several absent Members.

Briefing by the South African local Government Association (SALGA) on the 2017 Division of Revenue Bill
Mr Simphiwe Dzengwa, Executive Director: Municipal Finance, SALGA noted that transformation of the local government sector depended upon coordination between the three spheres and better planning, resource allocation and management within the sector. SALGA, the Financial and Fiscal Commission (FFC), the Department of Cooperative Government and Traditional Affairs (CoGTA) and the National Treasury (NT) engaged on various allocation scenarios at the Budget Forum in September 2016. At the SALGA National Elective Conference in November 2016, it was resolved to find alternative revenue instruments to enhance the financial viability of municipalities, to find measures to deal with increasing debt, currently amounting to R117 billion, to build financial capacity to manage both debtors and creditors and to find sustainable measures to resolve Eskom issues. The 2016/17 DORB redistributed substantial resources from the urban economy to fund services in the rural areas. Local government received 9.1% of the total budget, as against 47.5% for national and 43.4% for provinces. Efforts to improve financial management would focus on improved supply chain management and improved revenue management. SALGA would continue to lobby for increased allocations to the sector whilst continuing to provide support to municipalites to improve their financial management capacity and to enhance the quality of spending.

Discussion
The Chairperson thanked SALGA for a clear presentation. He liked the pie chart that showed that only 9.1% was allocated to the local government sphere. SALGA covered a number of areas under recommendations in its conclusion. The presentation also referred to a SALGA costing exercise to be conducted on recent demarcations with findings to be presented at the 2017 budget forum - Committees were urged to conduct hearings in those areas. SALGA would also continue to engage with the NT and CoGTA towards a better financial dispensation for local government. He found the recommendations interesting. Work had to be done with the FFC to review the Equitable Share (ES).

Mr T Motlashuping (ANC, North West) welcomed the comments and asked for some issues to be clarified. One of the unnumbered background slides spoke of increasing state debt. In the previous week, when the financial framework was dealt with, it was said that debt was decreasing. It was a matter of two tongues being spoken with - he asked for clarity on this. There were a large number of indigent households in Tshwane and Johannesburg. It was evident that the indigent register was not well managed. People erred with updating the register. It had to be reviewed and updated to help municipalities collect revenue. If the register was not well managed it should be of concern to SALGA. The presentation also referred to consequence management. Figures were needed which reflected whether people were being held accountable. He asked to what extent it would be possible to see if transgressors were not being employed in other spheres of government. One of the recommendations was for funding for alternative revenue instruments - SALGA asked what possible alternative revenue instruments could be. That was not a recommendation. SALGA had to say what had to be done. It had to empower the Committee by giving direction. New measures had to be proposed. The same applied to a large number of recommendations. He referred to demarcation and amalgamation - it was stated that there were instances in which amalgamation did not work. The situation remained the same. He asked what was supposed to be done and what SALGA would propose, if amalgamation was not a solution. Municipalities were meshed to become financially viable. If amalgamation did not work, SALGA had to propose an alternative. SALGA stated that it was concerned about farm evictions and that it might also be a concern of the Committee. Indeed it was. Mr F Essack (DA, Mpumalanga) would agree with him that it was important to expedite the Land Expropriation Act so that people could not be easily ejected from where they lived and where their roots could be traced.

Mr O Terblanche (DA, Western Cape) was aware that local government was the important sphere of government in that it dealt with people’s daily lives. It was generally so that there were excellent local authorities yet it remained the worst performing sphere of government. There was huge debt to local government because proper collecting systems were lacking. He had met with people where amalgamation had been done and the communities felt that service was not good. It was not about money appropriated by local government but rather about the performance of local government. He asked what SALGA was doing to get its own house in order. He was glad that the ES was being addressed but his concern was with proper management so that there could be service to the people.

Mr L Nzimande (ANC, KZN) referred to debt. Eskom had adopted a strong posture in switching off municipalities. He asked about mechanisms to deal with that. Municipalities were owned by government but nothing was being said about their options with regard to that. He asked if any work was being done with regard to that. Local government received 9.1% of the total government budget – was it known what share of GDP this represented? For some municipalities, grants made up their total budget - it was a key element for their survival. The assumption was made that municipalities could collect their own revenue. SALGA had to deal with that. There had to be hard bargaining for fiscus allocation. In the budget speech for KZN, it was budgeted for departments to pay local government. He asked if SALGA engaged at the provincial level with treasuries to solicit money for debt to local government.

Mr C De Beer (ANC, Northern Cape) referred to the DORB - it was stated that the DORB was the result of extensive consultation between national, provincial and local government. The budget forum that SALGA served on met twice a year. The 9.1% local government share had to be dealt with at the forum and when SALGA attended public hearings in the provinces. It was good to hear that CoGTA and the NT were assisting local government with financial management in keeping with the back to basics programme. There had to be follow-up to check on progress made. He asked for a list of provincial and national departments that owed local government money. The Richtersveld municipality was owed an enormous amount by three provincial departments. It was taken to the MEC for Finance and the acting Head of Department for Finance to be sorted out. Municipalities that owed Eskom also had to be called together with SALGA so that all could sit around a table and work out a way forward. There had been interactions between Eskom and the municipalities but there were problems every year. Parliament had to address the issue. When a municipality received money from electricity paid, it had to appear in the income statement, as revenue, and had to immediately go out in an expenditure statement as money owed to Eskom. It was not difficult. The municipal CFO had to perform that function in terms of the Municipal Finances Management Act (MFMA), which the Mayor, as well as the finance committee, had to oversee every 30 days.

The Chairperson noted that there would be hearings on the DORB on 2 May. Eskom and SALGA also had to be invited. A practical understanding of the DORB was needed. With regard to grants, municipalities were struggling to use the municipal Infrastructure Grant (MIG). He asked what support SALGA could provide in this regard. The NT had to be engaged about the ability of rural municipalities to apply the equitable share formula for basic service delivery. Municipalities were challenged in terms of available resources. Revenue collection had to be enhanced. All beneficiaries of services had to be accountable. The question was how to deal with the R117 billion debt issues. Other Committees dealt with it, but the Appropriations Committee was interested in the financial aspect. Public hearings could be a platform for dialogue. Areas for discussion could be sent to SALGA. The SALGA President had to be invited when provinces were dealt with. He asked about the trend regarding provincial budgets.

Mr Dzengwa replied that SALGA could come back with more detail. With regard to debt, at some point there had been a budget surplus but borrowing increased over the preceding three or four years. It was not sustainable to have to pay huge interest on debts. In the current context it was highly important how money was spent. It was not in order to pay interest on money that was not spent. All sectors of government had to see to it that resources were well spent and managed. It was not acceptable to be that deeply indebted. With regard to local government allocations, there were housing and drought issues but fruitless and irregular expenditure was not to be incurred. When the Auditor-General picked up issues of unauthorised or fruitless and wasteful expenditure, there had to be consequences for officials. Some officials were suspended and some lost their jobs. Revenue instruments were discussed at the SALGA Conference. It was necessary to investigate and experiment. Pool funding was tested in Gauteng municipalities where a number of municipalities joined their balance sheets for infrastructure programmes that would benefit all of them. SALGA made sure that the instrument was understood. From December to February, two courses were run on public-private partnerships. Municipalities would be invited in October to be taken through how to go about getting a bond.  SALGA cooperated with the NT and the Development Bank of South Africa (DBSA) on working with small towns, some of them old mining towns, to expose them to better planning instruments and to help them create jobs. The ongoing question, with regard to amalgamation, was what could be described as a viable municipality and what to do about those that were not. The FFC, CoGTA and the NT joined in discussions about the issue in the back to basics programme. There were three categories of municipalities - some were generally doing well, created their own revenue and had capacity.  Some were getting there but needed monitoring while others were what CoGTA called dysfunctional. CoGTA wanted such municipalities to amalgamate. There were difficulties however. A municipality might be unviable for a number of reasons. It could be because there was no tax base or industry in the area, so that people were unable to afford basic services. It had to be considered holistically. If municipalities were unviable before amalgamation, they would still be unviable after amalgamation- this then compounded the problem. The number of municipalities had been reduced from more than 1 000 to 843, to 284 and then to the current 267. The best model had to be found. CoGTA submitted a conceptual discussion document at MinMec. A possible solution could be to rather fund a municipality for whatever it could not do. Municipalities had challenges, but he could not agree with the view that local government was the worst performing sphere. There had been no studies that supported that. Local government paid more attention to published AG reports than provincial or national.

Mr Dzengwa said a list of departments owing municipalities could be compiled. Debt management policies had to be implemented. If government did not pay it had to be cut off. Provinces also had to be engaged. All government departments had to pay in October. SALGA, the NT and the Department of Public Works had to verify municipal debt. Provinces had to take responsibility. Eskom was worrying and the Committee could consider inviting SALGA along with Eskom. SALGA was concerned because provinces were saying that for Eskom to cut power was unconstitutional. Eskom delivered through a service level agreement with municipalities - it had to explain why that was denied. There were areas where Eskom supplied electricity where municipalities were unable to levy surcharges. Municipalities lost billions. Electricity was a major resource. Municipalities that owed Eskom were in the position where, even if what was collected was given over to Eskom, it would still be less than the Eskom bill. Eskom submitted bills at a certain date, in terms of the MFMA. If bills were not paid, municipalities were punished with interest. There was a fine plus 5%. It was unnecessary. A municipality would apply for 100 kilowatts and ESKOM would then ask what if more was needed. The municipality would then buy 110 kilowatts. If the municipality only used 101 kilowatts, Eskom would charge for 110 kilowatts. If Human Settlements put up new houses, electricity was needed. Municipalities would then be unable to notify Eskom in terms of the month to month arrangement. Eskom was punishing municipalities. The technical team at Eskom and municipalities could make a detailed submission on issues between Eskom and municipalities. New collection systems were being looked at. The municipal system was skewed against small municipalities. It was difficult for them to draw skills like chartered accountants. The skills base was inadequate. In terms of the spending of grants, municipalities had to apply to CoGTA for infrastructure grants but lacked the systems to do so. When SALGA engaged with Parliament, it had to ask whether SALGA could be allowed in the Division of Revenue Act to apply on behalf of municipalities when municipalities did not have systems to collect grants. SALGA engaged with the DBSA on how to assist municipalities to spend better on housing. It was actively engaged to find solutions to challenges.

The Chairperson asked the Committee to agree that issues flagged could be raised during public hearings. There would be a session devoted to public hearings on 2 May 2017. There would be submissions from public bodies so that detail could be delved into because, ultimately, the devil was in the detail. SALGA suggested that it be given a mandate to represent local government. A diagnostic report had to attend to capacity issues and how that could be dealt with. The Committee would extend an invitation to SALGA.

Consideration and Adoption of Draft Committee Oversight Report to the Western Cape
The Chairperson assumed that Members read the draft report and asked if all agreed with its contents. Members were in agreement. There was a seconded motion for adoption and the Draft Report was adopted without amendments.

Mr De Beer asked that there be follow-up on recommendations made at Saldanha.
 The Chairperson agreed.

Consideration and adoption of Committee Minutes
Minutes were considered and adopted dated8 January 2017, 31 January 2017, 21 February 2017, 23 February 2017, 28 February 2017 and 10 March 2017.

Consideration of Committee Programme for remainder of the term and second parliamentary term
Briefings to provinces would be on 22 March 2017 for the Eastern Cape, 24 March 2017 for KZN, Northwest and the Western Cape and 30 March 2017 for Mpumalanga.

There would be public hearings on 2 May 2017 and negotiating mandates on 3 May 2017. On 9 May 2017 there would be consideration of final mandates from the provinces and a draft report on the DORB.

A briefing on the Appropriation Bill was scheduled for 23 May 2017. The study tour would take place around August/September 2017.

The Chairperson adjourned the meeting.