Division of Revenue Bill [B4-2017]: public hearings

Standing Committee on Appropriations

13 March 2017
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

Cost of Municipal Basic Services Report by SALGA/FFC Costing of Municipal Services to Inform DORA Allocations

The South Africa Local Government Association (SALGA) submission on the Division of Revenue Bill dealt with the South African economic status and commented on the Finance and Fiscal Commission (FFC) recommendations. SALGA noted that all were in agreement that the country was characterised by slow economic growth, increasing state debt, high unemployment levels, large numbers of indigent households, which had a stark bearing and expression at local government level. It was against these realities that SALGA together with the FFC, the Department of Cooperative Governance and Traditional Affairs (CoGTA) and the National Treasury engaged on various allocation scenarios in the Budget Forum in September 2016. It was also these dynamics that were discussed at the SALGA National Elective Conference held late 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.

SALGA acknowledged the good work done by the National Treasury team in putting together the budget in a very trying environment. SALGA, as a participant in the budget, supported the theme of “Transformation for Inclusive Growth” which was articulated by the Minister of Finance. SALGA appreciated the general thrust of allocations of budget as contemplated by the Bill. SALGA supported the recommendations made by the FFC on Chapters 8, 9, and 10 of the Bill. The Division of Revenue Bill provided for a budget that redistributed resources to the rural poor. It aimed at distributing substantial resources from urban economy to fund services in rural areas. It also subsidised services to millions of poor households in towns and cities through considerable allocations to rural municipalities. SALGA welcomed the Bill for its effort to improve municipal financial management through “Four Game Changers” including the new Municipal Standard of Accounts; improved supply chain management, improved revenue management, and improved asset management.

SALGA would continue to engage with National Treasury to ensure that it considered the recommendations of the Cost of Municipal Basic Services Report, a study conducted by SALGA/FFC, and ensure a better financial dispensation for local government.

Members asked which municipalities were facing insolvency and how to address it; how municipalities could be assisted to collect money from users of municipal services so that they could in turn pay Eskom and other creditors.

The Rural Health Advocacy Project (RHAP) submission focussed on fiscal consolidation, the 2017 health budget, the National Health Insurance (NHI), the provincial equitable share, and provincial resource allocation. Health expenditure had grown in real terms by about 1.3% between 2012/13 and 2018/19. Increase in expenditure was driven by expansion of ART program, higher drug prices, increased cost of employment, and rising burden of non-communicable diseases. RHAP noted that the launch of the National Health Insurance Fund in 2017/18 was welcomed. However, exact details of its implementation remained unclear. Should it be implemented, potential risks included expenditure that could overrun as patients abandoned under-resourced district health care services. On the provincial equitable share, RHAP noted that there were a number of challenges with its calculation and the risk equalisation was not well defined.
On provincial resources allocation, RHAP noted that provinces received 80% of their revenue from national government. This was done by through the provincial equitable share and conditional grants. Given that the provincial equitable share was unconditional, provinces had significant discretion in allocation of resources. This often led to significant under funding of core services specifically rural health.

RHAP stressed that rural health should be prioritised. District health services were the frontline for health care delivery, but they were under resourced and in some rural provinces, provincial governments embarked on drastic rationalisation initiatives. It was especially important to take into consideration that over 40% of the population resided in rural areas and that six out of every 10 people in rural areas lived below the poverty line. Given the under-funded rural district health system due to moratoria on posts and inadequate operational budgets, the system was on the verge of collapse. This placed major health programmes such as the expansion of HIV treatment and the implementation of NHI at risk. RHAP recommended that equitable provincial health allocations should be reviewed to respond to unmet needs, geographic remoteness, population, specific political/historical circumstances and cost adjusters.

Members welcomed the submission and agreed with the key issues raised. Members felt that it was important to invite the Department of Health to brief the Committee on the impact of the Bill and whether quality health services were being delivered.

Equal Education focussed on the equitable share, redress, rurality, and the need for a conditional grant for scholar transport. On the equitable share, EE noted that poverty and inequality weighed particularly heavily on rural residents. EE strongly recommended that the Equitable Share Formula be revised to consider the greater needs of rural areas when allocating funds to provinces. The cost of providing equal education in a rural province was much higher due to its historic underfunding and often dire economic circumstances. The EE recommended that (i) National Treasury make a solid commitment to revising equitable share to take into account costs of education provisioning in rural areas and increasing the poverty component of the formula; (ii) the time frame for the Equitable Share review be made public; (iii) the review ought to be include a period of public consultation on proposed models for new Equitable Share formula.

On the on-going scholar transport crisis, EE recommended that the Committee reiterate its previous recommendation that a conditional grant should be considered for scholar transport and to call Treasury to account on all steps taken toward the design and implementation of conditional grant.

In the meeting, National Treasury responded that the recommendation on scholar transport was very problematic to implement because of disagreement between the Departments of Transport and of Basic Education. The Committee should assist Treasury to implement the recommendation by inviting the departments concerned – National Treasury, Department of Transport and Department of Basic Education – to brief the Committee on what might be the challenges in order to find a way of addressing the policy gap that created problems.

The Chairperson noted the concerns that ought to be followed up by the Committee to see the Eskom matter resolved, scholar transport addressed, and to invite the Department of Health to brief the Committee on whether quality health services were being delivered.

Meeting report

SALGA submission
Mr Simphiwe Dzengwa, Executive Director: Municipal Finance, noted that all political parties were in agreement that the macro-realities of the country was characterised by slow economic growth, increasing state debt, high unemployment levels, large numbers of indigent households, etc. have a start bearing and expression at local government. It was against these realities that SALGA, the Financial and Fiscal Commission (FFC), the Department of Cooperative Government and Traditional Affairs (CoGTA) and the National Treasury engaged on various allocations scenarios at the Budget Forum in September 2016. It was also these dynamics that he discussed at the SALGA National Elective Conference in late 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.

Commenting on the 2017 Division of Revenue Bill, Mr Dzengwa said that SALGA acknowledged the good work done by National Treasury in putting together the budget in a very trying environment. SALGA, as a participant in the budget, supported the theme of “Transformation for Inclusive Growth” which was articulated by the Minister of Finance to include (i) transformation that opened the path to inclusive economic growth and development; (ii) growth without transformation would only reinforce the inequitable patterns of wealth inherited from the past; (iii) broad-based transformation should promote growth, mobilise investment, create jobs and empower citizens; and (iv) the budget that played a central role in transformation by promoting redistribution and direct scarce resources towards catalytic investments in human and physical capital.

As a response to the FFC Recommendations, SALGA supported the recommendations with respect to Chapters 8, 9, and 10 of the Bill. He remarked that the Bill provided for a budget that redistributed resources to the rural poor. It aimed at distributing substantial resources from the urban economy to fund services in rural areas. It also subsidised services to millions of poor households in towns and cities through considerable allocations to rural municipalities. Metropolitan municipalities accounted for 70% of personal tax revenue, but received only 31% of local government transfers. The same percentage of transfers was received by rural local municipalities which however accounted for only 5% of personal income tax revenues. He welcomed the Bill for its effort to improve municipal financial management through the “Four Game Changers”: the new Municipal Standard of Accounts; improved supply chain management, improved revenue management, and improved asset management.

Commenting on the Bill, Mr Dzengwa said that SALGA appreciated the general thrust of the budget and that SALGA would continue to engage with the National Treasury to ensure that it considered the recommendations of the study conducted by SALGA together with the FFC on the Cost of Municipal Basic Services. SALGA would continue with its endeavours for a better financial dispensation for local government.

Discussion
Mr A Shaik Emam (NFP) asked which municipalities were facing insolvency challenges regarding their assets and liabilities and how does one go about addressing the problem of insolvency. He remarked that 80% of budget went to municipalities but there were problems of fruitless and wasteful expenditure and underspending. What was SALGA’s view on encouraging a business model for municipalities?

Dr C Madlopha (ANC) asked what SALGA's long term solution was to address the municipal crisis. She remarked that municipalities were not putting aside infrastructure in their budget when they were experiencing underspending. She asked whether it was possible to get the Cost of Municipal Basic Services Report by SALGA/FFC referred to in the submission.

Ms M Manana (ANC) asked about the pervasive Eskom debt owed by municipalities and what would be the solution to it. What alternative revenue could be used to enhance the capacity of municipalities. People were not paying for their municipal services and owed the municipality money. How could we assist municipalities to collect their money from debtors? Due to these huge debts, municipalities were, in turn, debtors.

Ms D Senokoanyane (ANC) asked about the consequences for mismanagement of funds especially penalties or disciplinary measures. Why were people not paying the municipalities? Why were municipalities not paying Eskom? She was of the view that SALGA had a difficult role in monitoring municipalities and asked what the challenges in monitoring local government were.

Dr M Figg (DA) asked if municipalities could do more to contribute to economic growth and what could be their contributions. What might be the main creditors of municipalities? It seemed that municipalities were experiencing the challenges of managing their own financial affairs. What was SALGA doing to assist municipalities in ensuring that the revenue was collected?

Mr N Gcwabaza (ANC) remarked that he had not been hearing about municipal revenue collection for a while. He thought the matter was resolved. He asked what could be done to address the collecting of revenue and on whether technological means could be used to collect revenue. How could the illegal connection of water and electricity be addressed? Illegal connections have a negative impact on municipal revenue. There was also the illegal extension of flats in addition to illegal connection of water and electricity. He asked if municipalities owing Eskom had been resolved.

Mr Dzengwa responded that there were many studies that SALGA would be happy to share with the Committee, including the study referred to in the submission. These documents contained more information on causes of municipal insolvency. There was one document compiled by National Treasury and contained very sensitive information. Indeed, there were municipalities that were unviable, but they did not choose to be unviable. Demarcation mechanisms could not be a good response to solving unviability. The problem of municipalities not paying Eskom persisted. In 2015, National Treasury intervened to ensure that municipalities paid Eskom. Agreements were concluded between municipalities and Eskom on how municipalities would clear their debts. Later, municipalities began defaulting again and matters went back to square one. SALGA was engaging municipalities to get to their root causes for owing Eskom or defaulting. There was also an inter-ministerial committee established to look into these matters. Eskom was billing the municipality on a 15 day basis whereas municipalities were collecting revenue on a 30 day basis.

Municipalities were facing a problem as they lacked profiling of their clients and did not know their economic status. They were not aware of who was working or not, or rich or poor. The pertinent question was why people could pay Edgars, PEP or Mr Price but could not pay for municipal services. Why were municipal bills were not cleared? The absence of knowing who was working or they household income made it difficult for municipalities to enforce payment.

Mr Dzengwa replied that the alternative mechanism of use of technology to collect revenue was considered. SALGA along with CoGTA investigated a number of models and concluded that a technological model could be used to collect revenue. There was an instrument that was identified and should be soon tested.

On illegal connections, Mr Dzengwa responded that municipalities should monitor these cases and deal with them in terms of by-laws. There was no way a flat could be extended without its plan being approved by the municipality. If it was extended without approval, the structure would be illegal on the basis of non- compliance with municipal by-laws.

Mr Shaik Eman remarked that Eskom was a business-like entity whose operation depended on the revenue it raised. This ought to be noted by municipalities and thus they should do their best to pay for Eskom services. Municipalities could not default on the grounds of their clients’ failure to pay. Municipalities should find ways to collect revenue.

The Chairperson asked what would be done to improve the municipal revenue collection. Could National Treasury deduct money allocated to municipalities in order to pay Eskom.

Ms Wendy Fanoe, Treasury Chief Director: Intergovernmental Policy and Planning, responded that Eskom was a national asset that needed to be paid in order for it to run its electricity business. When municipalities were unable to pay, they should approach Eskom to find ways of clearing their debt. On the proposal of deducting budget allocated to municipalities, she responded that this was a complex issue. It was not only municipalities who owed, even provincial departments owed Eskom and various other creditors.

Rural Health Advocacy Project (RHAP) submission
Mr Russell Rensburg, RHAP Programme Manager: Health Systems and Policy, gave a submission that focused on fiscal consolidation, the 2017 Health budget, the National Health Insurance (NHI), the provincial equitable share, provincial resource allocation, provincial health expenditure 2001/02-2014/15, towards equitable provincial health allocations and towards better health for all.

On the 2017 health budget, Mr Rensburg noted that health allocation was split between the national and provincial Departments of Health. Health expenditure had grown in real terms by about 1.3% between 2012/13 and 2018/19. Increase in expenditure was driven by the expansion of the Anti-retroviral Therapy ART programme, increased drug prices, increased cost of employment, and rising burden of non-communicable diseases.

On the NHI, Mr Rensburg noted that the launch of the National Health Insurance Fund in 2017/18 was welcomed. However, exact details of its implementation remained unclear. Should it be implemented, potential risks included expenditure that could overrun as patients abandoned under-resourced district health care services.

On the provincial equitable share, Mr Rensburg noted that there were a number of challenges with the calculation and that the health component was problematic. In the latter context, the risk equalisation was not well defined. Further clarity was therefore needed.

On provincial resources allocation, Mr Rensburg noted that provinces received 80% of their revenue from national government. This was done through the provincial equitable share and earmarked funds or conditional grants. He viewed the provincial equitable share as being flawed. However, it did take into consideration the various developmental obligations. Given that the funding allocation was unconditional, provincial legislatures had significant discretion in allocation of resources. This often led to significant under funding of core services specifically rural health.

Mr Rensburg stressed that rural health should be prioritised. District health services were the frontline for health care delivery, but they were under resourced and in some rural provinces, provincial governments embarked on drastic rationalisation initiatives. It was especially important to take into consideration that over 40% of the population resided in rural areas and that six out of every 10 people in rural areas lived below the poverty line. Given the under-funded rural district health system due to moratoria on posts and inadequate operational budgets, the system was on the verge of collapse. This placed major health programmes such as the expansion of HIV treatment and the implementation of NHI at risk.

Mr Rensburg recommended that equitable provincial health allocations should be reviewed to respond to unmet needs, geographic remoteness, all population, specific political/historical circumstances and cost adjusters. It should ensure a better health for all. In this regard, priority health interventions should seek to achieve health system goals, broadly defined as maximisation of health, reduction of inequities in health and financial protection against the costs of ill health.

Discussion
Ms S Shope-Sithole (ANC) welcomed the submission and agreed with the key issues raised in the submission. She was of the view that both the NHI and the Department of Health should be invited to brief the Committee because it was clear that the NHI and the DOH were affected by the Bill. National Treasury should ensure explain to the Committee what they meant by fiscal consolidation and she hoped that Treasury did not mean fiscal austerity.

Mr A McLaughlin (DA) asked what help the RHAP was requesting from the Committee to address the concerns raised in its submission.

Dr Figg said the submission illustrated what the problems were. These were issues that should be taken into consideration when the Committee consider the question of funding.

Dr C Madlopha (ANC) remarked that she was not aware of the funding of the NHI and asked about the moratorium. She felt that the Department of Health had to be present every time health matters were discussed.

Mr Gcwabaza remarked that people believe that throwing money at a problem would address the problem. This was not always the case. He asked why a focus should not be on quality of healthcare services because putting more money in the project might not address the existing problem.

Mr Rensburg responded that the question was not about utilisation of allocated money or just increasing the budget but how money could be better allocated.

Ms Shope-Sithole said that response made her believe that the Department of Health should always be present because the problem did not lie with funding but with service delivery.

Mr Shaik Emam asked what role was played by RHAP to ensure that the budget was allocated or spent in line with the needs of the people.

Ms Fanoe responded that austerity meant cutting budgets and the Bill was not about reduction of budget. National Treasury had been increasing the budget or allocating it equitably. Treasury was focussing on funding health and education. On the question of the NHI, Treasury was still learning lessons from other countries’ experiences. She agreed that it was important that the Department of Health brief the Committee on the question of whether the Department of Health was taking the nation in the right direction.

Equal Education (EE) submission
Ms Philile Ntombela-Masson, EE Researcher, highlighted the Equal Education’s concerns with the Equitable Share Formula and (ii) Treasury’s progress on the Standing Committee’s recommendations regarding a conditional grant for scholar transport. The submission focussed on the equitable share, redress, rurality, scholar transport, and a conditional grant for scholar transport.

On the equitable share, Ms Ntombela-Masson noted that poverty and inequality were features of the lives of many South Africans and that this yoke weighed particularly heavily on rural residents. It was against this backdrop that EE strongly recommended that the Equitable Share Formula be revised to consider the greater needs of rural areas when allocating funds to provinces. The cost of providing equality education in a rural province was much higher due to its historic underfunding and often dire economic circumstances, as well as the geographic, infrastructural and demographic characteristics of a rural area.

Providing its recommendations, the EE noted that in the exercise of revising the Equitable Share Formula, National Treasury should consider the true cost of providing an adequate rural education, so as to ensure that those in the most need received the most aid. In this light, the EE recommended that (i) National Treasury make a solid commitment to revising equitable share to take into account costs of education provisioning in rural areas and increasing the poverty component of the formula; (ii) the time frame for the Equitable Share review be made public; (iii) the review ought to include a period of public consultation on proposed models for new Equitable Share Formula.

With regards to the on-going scholar transport crisis, EE recommended that the Committee reiterate its previous recommendation that a conditional grant should be properly considered for scholar transport and to call Treasury to account before the Committee on all steps taken toward the design and implementation of the conditional grant, including steps to engage all relevant stakeholders.

Discussion
Mr Shaik Eman welcomed the submission and asked whether the National Treasury was responding to recommendations made by EE regarding education in rural area, on whether quality education was provided, and on the role of EE to ensure that quality of education was provided. Transport and Basic Education should be invited to present.

Dr Figg remarked that there was a resistance of civil societies to blame the government; instead of making an effort to engage with departments and their entities with a view to finding core solutions. He accepted that every child enjoyed the right to basic education, but the realisation of right might not require allocation of more money. The problem might be implementation or using allocated budget for what it was required for.

Ms S Shope-Sithole remarked that she was grateful for the EE inputs which led to the question of whether a value-for-money education was provided and asked why the Treasury did not respond to the Committee’s recommendation.

Ms Fanoe responded that the recommendation was very problematic to implement because of disagreement between the Departments of Transport and of Basic Education. The Committee should assist Treasury to implement the recommendation by inviting the departments concerned – National Treasury, Department of Transport and Department of Basic Education – to brief the Committee on what might be challenges in order to find a way of addressing the policy gap that created problems in responding to the Committee’s recommendation.

Dr Madlopha asked who was responsible for giving inconsistent data which had impacted on allocation of funds and whether the EE supported the rationalisation approach. If it did not support the rationalisation approach, what could be an alternative approach?

Mr Shaik Eman remarked that EE made numerous contentions and requests and asked how it could be assisted by the Committee to find solutions. He asked whether the EE had an exact figure for physically challenged learners who needed transport for education.

Mr Gcwabaza said that he preferred to give homework to EE. He noted that it was very surprising that the government was distributing proper houses but could not provide scholar transport to learners in the greatest need. This was not the only problem that hindered children from attending school. There were other factors such as drugs, bullying, and gangsterism. Could EE conduct a study on what the effect of drugs, bullying and gangsterism was on the education of children and what could be done to address these issues and what could be other causes of dropping out of school?

Mr McLaughlin remarked that a big chunk of the budget was spend on education, but still, some problems persisted because there was no one who wanted to take responsibility. You would find that some issues could not be resolved because the Department of Basic Education would argue that the responsibility rested with another department. For example, if the toilets were not in good condition, the Department of Basic Education might argue that it was the responsibility of the Department of Water and Sanitation which was not delivering. Some issues were complex. Transporting learners was involving the Department of Transport.

Ms Fanoe thanked the presenters and members for their time, contentions, inputs, comments, and suggestions. She noted there was a section in the Bill that needed to be researched and thus fixed. However, in certain instances Parliament would have to take a decision. The funding and costing model were discussed at Treasury level. These models were technical. They were identified when a question was asked such as what would be the cost of implementation.

The Chairperson thanked members and presenters for their full participation. Members were concerned to see the Eskom matter resolved and that scholar transport was addressed. Members felt that it was important to invite the Department of Health to brief the Committee on the impact of the Bill and whether quality health services were delivered. These were the concerns raised that ought to be followed up by the Committee.

The meeting was adjourned.

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