Division of Revenue 2018/19: Financial and Fiscal Commission submission

Meeting report

Mr N Ngcwabaza (ANC) as the Acting Chairperson welcomed the FFC delegation. He noted that Chairperson Phoswa was unable to attend due to illness and admission to hospital.

Financial and Fiscal Commission submission on 2018-19 Division of Revenue
Prof Daniel Plaatjies, FFC Chairperson, said that FFC had looked at the role of key cities and how they contribute towards economic development; how urban development can enhance the development of cities as urbanisation continues to increase at a rapid rate. Information, findings and recommendations were based on data, regression analysis, and micro-simulations, reading and reviewing a range of policies and legislation, as well as discussions with senior personnel in municipalities and relevant departments. FFC also considered previous recommendations made in its submission for DoR 2016/17: Challenges Associated with Public Infrastructure and DoR 2017/18 Rural Development and Intergovernmental Fiscal Relations (IGFR).

As introduction to Urban Development and IGFR, urban areas in South Africa are important as they account for about 20% of the land and currently the proportion of urban population is sitting at 62% and is projected to be around 70% by 2030. The rapid rate increase in urban population led to a gap between demand and supply of urban services. Therefore, urbanization has emerged as a key policy and governance challenge in recent years.

Some of the problems he highlighted included a stagnant economy which barely sustains positive growth and poses serious challenges given the limited fiscal space; incidence of urban poverty has generally declined though number of urban poor is still high, as although urban migration has been the great escape valve in preventing a larger increase in rural poverty, it has now been displaced toward urban development; and most notably urban inequality is exceptionally high and increasing, the average Gini coefficient across provinces is very high which suggests and translates to the level of inequality that is prevalent in South Africa. These problems are exacerbated by ineffective governance stemming from:
- City governments not optimally geared for meeting the challenges;
- Insufficient funding particularly for infrastructure investment;
- Outside the metros urban governments are impeded by a costly two- tier system; and
- City government use obsolete management systems.
But the question remains ‘how can IGFR instruments assist spheres of government in addressing these challenges’.
 
Dr Ramos Mabugu, FFC Head of Research and Recommendations Programme, highlighted the key results which included an overview of the current economic situation as well as infrastructure provision. He said FFC thus recommended that:
• Over the medium term, Government should continue with a gradual programme of fiscal consolidation that entails reducing the budget deficit moderately but consistently. Such efforts to preserve fiscal sustainability must be maintained in the future, even with the addition of longer• term programmes such as National Health Insurance;
• Government should actively and specifically continue pursuing the implementation of significant capital investment in public infrastructure that has a positive impact on total factor productivity and employment in the context of the National Development Plan;
• National government develop and promote the development of urban• rural relations by:
- Strengthening rural-urban linkages and policy coordination between rural and urban spaces;
- Ensuring rural infrastructure investments are better targeted;
- Promoting productive social safety nets; and
- Providing incentives to encourage new industries and businesses in rural areas as a strategy to decongest urban areas.

Dr Thembie Ntshakala, FFC Program Manager: Intergovernmental Fiscal Relations, gave an assessment of the Integrated Development Framework and Cities Support Programme and noted:
- Post-1994, Government introduced numerous policies driven by the urgent need to address inequality and injustices of the past;
- In recent times, National Treasury has championed the Cities Support Programme (CSP) while the Department of Cooperative Governance and Traditional Affairs (COGTA) coordinates the Integrated Urban Development Framework (IUDF); and
- Notwithstanding ongoing efforts, there is still rapid urbanisation, urban inequality and poverty.

The findings of the research with regards to this policy included the following key points:
- The Urban Development Framework (UDF) had intentions to deal with rapid urbanisation, urban poverty and inequality;
- Suffered from inconsistency in its championing, coordination and lacked a specific funding instrument and implementation plan;
- The CSP has a strong coordination element, as the programme works with national government to shift policy in a way that makes it easier for cities to work more efficiently, while working with cities to ensure economic growth and a reduction in poverty;
- Taking lessons from the UDF, the IUDF process of preparation was more inclusive and consultative
- To ensure implementation, IUDF has identified coordination structures and also acknowledges COGTA as department responsible for integrated urban development and thus for collaborating with other stakeholders
- IUDF is an over-arching and multi-sectoral framework but lacks a specific own funding instrument, hence its successful implementation is dependent on various actors

FFC recommendations include that:
• COGTA and DPME continue strengthening coordination and monitoring mechanisms by ensuring that departmental sector plans and strategic investments are aligned to local spatial plans and priorities, and coherent with national objectives espoused in the IUDF.
• COGTA and National Treasury should consolidate the urban development related grants so as to achieve the IUDF objectives and address urban development holistically.

On Cities Compaction: In 2011 FFC recommended that South Africa needed to pursue development of a compact city form. This urban form is more beneficial, because the benefits include lower costs and expenditure by households; a reduction in public infrastructure investment requirements; smaller public transport subsidies and less carbon emissions. So FFC research assessed current policies and institutional arrangements supporting the creation of compact cities to determine whether policies are consistent, mutually supportive and aligned to the spatial development agenda of the city and evaluated the incentives, grants and other fiscal instruments designed to support compaction. Findings of the research showed that metros’ strategies, frameworks and guidelines demonstrate a clear understanding of compaction. There were clear objectives outlining what a particular policy instrument aims to achieve regarding compaction; however, implementation guidelines were inadequate and in some instances completely absent. In addition, there are neither incentives nor specific funding instruments for compaction. While a number of fiscal instruments that fund the built environment and spatial restructuring make reference to spatial development framework (SDF) at municipal level, they are often not aligned to municipal SDFs. FFC recommended that:
• National Treasury introduces an incentive grant specifically targeted for city compaction, an urban form that has the potential to remedy ‘apartheid geography’ and bring the masses closer to work opportunities and facilities. The spatial development grants currently accessed through the Built Environment Performance Plans (BEPPs) treat compaction as only a negligible component of spatial transformation.

On Transport and Mobility: Dr Mabugu said that despite policy, implementation and performance of the full set of transport functions by urban municipalities has been relatively slow. Only four cities have an operational bus service covering part of the city out of the 13 cities that have been receiving national grant funding for Integrated Public Transport Network implementation. He emphasised that the slow pace of cities acquiring assigned transport functions is likely to perpetuate the status quo in urban transportation. Urban municipalities face various challenges preventing them from assuming transport functions contained in the National Land Transport Act such as inadequate and unsustainable funding, lack of capacity to implement policy, inadequate institutional structures and lack of policy monitoring.

Research findings on transport and mobility included a funding gap that exists between what is required for urban municipalities to implement and manage public transport networks, versus the funding that is available – this is due to significant capital requirements, and significant operating shortfalls resulting from high costs and limited system revenues. If implemented efficiently, additional sources of income in large urban municipalities could provide the income for public transport functions. However, these additional sources of income may not be enough to bridge the gap of inadequate funding. FFC recommended that:
• The Department of Transport should review the Public Transport Network Grant; investigate options to shift sources of funding towards retaining locally earned fiscal revenue, and ring fence the local income sources for public transport use. Examples include possible retention of a larger portion of the fuel levy generated in the municipality.
• The Department of Transport should support the development of approaches to Integrated Public Transport Networks that support financial sustainability. These approaches should focus on leveraging the strengths of existing services, promoting incremental improvement of public transport based on affordability and impact, recognising the significant role that new technologies will play in providing demand responsive services, and considering alternative models of industry transformation. This could take the form of piloting and sharing learning from revised approaches to Integrated Public Transport Networks in one or more urban municipalities and should be funded through the Integrated Public Transport Network Grant or similar funding instrument.

On Aligning Urban Housing Supply and the Unhoused Urban Population: As the growth in urban population has not been matched by the number of new residential properties constructed – the research found that in metros and secondary cities, the unhoused population exists across all income groups, and the highest number of unhoused population is found within households earning between R4 000 and R9 000 per month (housing value worth between R130 000 and R300 000). FFC recommended that:
• The Department of Human Settlements should undertake a review of the Finance Linked Individual Subsidy Programme (FLISP) to find ways of ensuring that qualifying individuals who are single and without dependants are included as beneficiaries and that FLISP is implemented in a standardised manner across provinces.
• The provincial departments of human settlements and other key departments including the provincial departments of basic education and transport should align their delivery plans particularly for new human settlements development. This can be done by:
- Establishing functional inter-sectoral coordination committees where relevant departments will meet to discuss new infrastructure development projects relating to habitable human settlements; and
- Ensuring that the portion of the Education Infrastructure Grant and funding from the Provincial Equitable Share are aligned to the portion of the Human Settlements Development Grant for new housing developments.

On Effects of Municipal Spending on Urban Employment: Ms Poppie Ntaka, Researcher: National Budget Analysis Unit, noted that South Africa has one of the highest unemployment rates in the world which has remained above 20% since 1994. Despite the widespread perception that unemployment levels are generally lower in urban centres compared to the rest of the country, the reality is that urban municipalities face high unemployment levels that are almost as high as the national average. So the research found that spending on the Expanded Public Works Programme (EPWP) and Community Work Programme (CWP) has significant positive effects on total level of employment for metros but not for other urban municipalities such as secondary cities and large towns. This finding corroborates previous FFC research which found that EPWP employment opportunities were concentrated in metros. By design, the EPWP is intended to create short-term job opportunities as opposed to long-term employment. However, the results imply that the programme has the potential to create economic value through spill-over effects. Infrastructure spending showed no statistical significance for urban municipalities. Needless to say, this finding is surprising given that infrastructure spending is regarded as a key determinant for employment and economic growth.

FFC recommended that:
• The employment creation role of the EPWP should be expanded to specifically target secondary cities and large towns;
• The Department of Public Works and COGTA should carry out an assessment of the EPWP Integrated Grant For Municipalities to ascertain how the grant can be redesigned to encourage more secondary cities and large towns to apply for a bigger portion of this grant.

On Urban Informal Employment Support, the contextual urban challenge meant that informality is poised to become an important driver of urbanisation because of the low formal sector labour absorption rate and informal employment provides easy entry into the urban economy.

The FFC findings were that the informal sector provides 16% of the employment in the country and metropolitan areas. Rapid urbanisation has not been accompanied by decline in unemployment, in fact, a high unemployment rate coexists with high levels of urbanisation (up to 100% in some areas). It is important to note that informal employment is not growing at a rate consistent with high unemployment due to a number of growth constraints, and local government approaches for dealing with informal employment are predominantly regulatory and national and provincial policies are not backed by requisite funding allocations with only 2% of total budget to support small businesses that the informal sector accounts for.

FFC recommended that:
• The Department of Small Business Development, COGTA and provincial departments of economic development consolidate, regularise into long-term budget line items and decentralise the different funding programmes (such as Jobs Fund, Informal and Micro-enterprise Development programme, Shared Economic Infrastructure Facility programme) for informal enterprise development (within national and provincial departments and development finance institutions (DFIs) to metropolitan municipalities and secondary cities.
• The Department of Small Business Development in collaboration with the provincial departments of economic development must invest in grant beneficiary information management system to minimise double dipping and to monitor the impact of various funding support programmes including the Jobs Fund, Informal and Micro-enterprise development program, Shared Economic Infrastructure Facility programme. Lastly, The Department of Small Business Development as the custodian of informal enterprise development policy and coordination with the cities should ensure that existing financial and non-financial support programmes holistically address informal enterprise growth constraints within the city space rather than focusing on formalising informal enterprises.

On Financing of Urban Municipalities and Own Revenue Diversification, Dr Mabugu cited the twin challenges of rapid urbanisation and slow economic growth plus a stagnant property tax base placing tremendous fiscal pressures on the nation’s urban municipalities and also challenging ability of local governments to continue their current levels of public services. Secondary cities and metros in particular require more resources to invest in infrastructure in order to attract new investment and build dynamic economies, increase employment, create vibrant communities and improve livelihoods. As urban challenges increase, so does the need for financial resources. Although the 29 largest cities (21 secondary cities and 8 metros), have demonstrated significant fiscal effort (relative to other categories of municipalities), own revenue sources are insufficient to meet their obligations and requirements.

FFC research found that large towns need to diversify revenue sources. Alternative sources of revenue were:
- Municipalities Credit Rating Mechanism;
- Pooling Finance Mechanism (i.e. municipalities that share a similar vision and credit characteristics coming together to access public sector funding, issue bonds or jointly access bank finance) which satisfy most principles defining a good revenue option for large cities;
- Land Value Capture (i.e. seizing the positive impact of municipal investments on land values and to use such funds as a source for financing municipal projects) where successful implementation depends largely on the proper design of levy, a clear legal framework, effective land use management systems, well trained and capacitated persons charged with its implementation, and an efficient, accurate and timely land valuation;
- Public Private Partnerships which require that the approval process is streamlined and specialised capacity to originate, implement and manage PPPs within municipalities.

FFC recommended that National Treasury improves access to credit markets for large cities by:
• Allowing them to use their infrastructure grant funding allocations to leverage private capital;
• Establishing a credit rating mechanism for municipalities with the Development Bank of Southern Africa as the most suitable public entity to lead the establishment of this;
• Requesting DBSA facilitate the creation of a special purpose vehicle to facilitate the pooling of financial resources by large cities for the purpose of joint bond issuance and lending to large cities;
• The Public Private Partnership Unit at National Treasury improves the public private partnership deal flows within municipalities by:
- Streamlining the PPP approval process by subjecting only high value (above R100 million) and complex projects to rigorous feasibility studies
- Using the Financial Management Grant to build capacity within large cities in specialised skills in public- private partnership development, procurement, negotiating and monitoring.
- Incentivising public-private partnerships through adopting a national facility for financing feasibility studies in municipalities
- National Treasury creates awareness of land value capture fiscal instruments among large cities and extends the scope of the Financial Management Grant to cater for capacity building in the design and implementation of land value capture mechanisms.

Prof Plaatjies, FFC Chairperson, stated that in a nutshell the submission for this year is looking essentially at the role of cities in the SA economy, how cities can contribute towards economic development and economic growth. What is critical is that the submission is based on official statistical data from Statistics SA, National Treasury data and financial economic data that FFC obtained.

Discussion
Mr B Topham (DA) referred to alternative finance sources for cities and said the idea of pooling funding in municipalities is a subject very close to him but obviously the PFMA would prevent that from happening. He asked FFC if there are any specific amendments that it proposed for the PFMA to allow the pooling of funding amongst municipalities. Secondly, are there suggestions to ensure that in the event one municipality defaults with its creditors and has its assets seized, it will not affect the other municipality that it is pooling funds, specifically where one municipality would have governance challenges.

Mr A McLoughlin (DA) stated that in Chapters 6 and 10, broadband was not mentioned broadly. He believed that broadband connectivity would be considerably useful in education and in municipalities and how they can interact with each other. He asked if FFC has any recommendation on how this can be achieved and funded. Has FFC looked at what steps the country can take to make it actually happen?

He cited the FFC recommendation for the EPWP programme to be expanded in cities and large towns. However, funding is the bottom line and the EPWP does not generate any income; it dishes money out – there is no direct return to government. It is an unsustainable programme that continues to give out money without any returns. So if municipalities are encouraged to borrow more that increases the national debt, because it is money that will have to be paid back eventually. The ideal situation is to change the economic environment. He would have liked to see something more focused on that point i.e. how the economic environment can be changed.

Mr McLoughlin said Chapter 11 argues in favour of an increase of grants to municipalities. Municipalities are the coal face of government because it is where government services are delivered to the people. Perhaps government can authoritatively argue for a fair increase in the amounts of grants or equitable share to municipalities in order to allow the municipalities to meet the high demand for service delivery.

He shared the same sentiments on Land Value Capture, but argued that when you have lower economic growth the value of properties goes down as well as the rates and the valuation since the demand is less and one cannot sell one’s property. This downward spiral means things cannot be funded that decline in value, which in turn makes it difficult to get loans and use your assets as collateral – one cannot use assets whose values are susceptible to decline.

Ms D Senokoanyane (ANC) referred to the post 1994 policies that were introduced driven by the urgent need to address inequality and injustices of the past. She asked whether the policies provide a sound and solid response to urban challenges. The rapid growth of urbanisation was certainly not foreseen. With that being said, she asked if the FFC believes that those policies and processes put in place were incorrect.

She asked for clarity on slide 13 that stated “Integrated Urban Development Framework is an over-arching and multi-sectoral framework but lacks a specific own funding instrument, hence its successful implementation is dependent on various actors”.

On slide 19, it stated “only four out of 13 cities that have been receiving the national grant funding for Integrated Public Transport Network”. She asked FFC to provide reasons for this. Lastly, she asked for clarity on the integrated development plan that is in line with education and human settlements.

Ms M Manana (ANC) referred to Chapter 4 Transport and Mobility and noted that the majority of people in Tshwane do not utilise the bus transport system. Can the FFC clarify this because people did not come up with tangible reasons why they do not utilise the bus service? Secondly, what were there key findings of the research conducted on city compaction? Thirdly, what strategies and solutions can be employed by government to encourage rural linkages so that rural investments are better targeted and how can the social safety network be promoted? DTI is already providing incentives to encourage investment, so how will the rural incentives differ from existing incentives and where will they be sourced in this slow growing economy. What government programmes and strategies can be adopted to fight inequality and poverty in urban areas?

The Chairperson asked for a broader explanation of rural development and whether it has been taken seriously since 1994, because if it were taken seriously it would have balanced out the mass urbanisation. Is there any progress in rural development, and if there is, why the huge influx of people to urban areas?

Special Economic Zones have been brought into the picture to influence economic development in rural areas, relatively new, so is any economic activity beginning to show in rural areas as a result of the Special Economic Zones and how can it be strengthened to balance urban/rural development.

Reference was made to property prices which is largely the reason some people cannot afford properties or accommodation in urban areas, even if they are earning reasonable salaries. What has been prevalent lately is turning affordable accommodation into expensive accommodation so exclusion continues. Thus, who controls and determines property prices and how can this subject be dealt with to break through this exclusion and the apartheid spatial patterns?

FFC response
Dr Plaatjies replied that if FFC is unable to answer some of the questions it will respond in writing in order to provide comprehensive answers. On funding in urban cities and the legislative limitations of the PFMA is a matter to be considered. The recommendations are made based on what the South African population requires to ensure that urban development happens and economic growth. This in itself has key requirements meaning that systems, structures, key legislation and processes require further exploration by National Treasury. When the FFC brings recommendations to Parliament it is normally for Parliament to consider and then present a considered view on a way forward because singularity or silo mentality is not going to assist government to move forward and achieve its objectives. At for the PFMA, there is a need to look at how this gets done.

On loans and the pooling of funds, this requires a deeper conversation on how it can be achieved and guarantees that sit with loans as well as the collateral effect that goes with it. This practice has not occurred yet but opportunities are seen going forward and the proposal suggests that it needs to happen but it does not say that it must happen immediately. It is a policy consideration that has to be made; it is a national consideration and not one department or ministry to do it, because the load shifts.

The FFC view is not necessarily that policy and legislation are not proper and correct. However, there is a whole systems review that has to be made in relation to the capabilities of the state. He asked the Committee to re-imagine that it is not about finance all the time but systems, people, structures and legislation in order to make this happen. In many instances, we are not looking at these things holistically to ensure that these things happen. The policies and legislation are the best but the implementation of those policies continues to be a challenge – the lack of an implementation plan cripples progress, and there are a lot of value chain matters that require to be looked at.

On rural linkages, part of the FFC representation done last year was that the quality of education and water and sanitation needs to be looked at because it was a key problem in rural communities. There are a lot of reasons people move from rural to urban areas, for employment; education; cost of living etc. Those linkages are not necessarily a rural/urban question but the focus of intervention. Hence the unviable nature of some schools are some of the key considerations why people move.

The break in apartheid spatial patterns is spot on, but that is a South African story hence the FFC commented on the Gini coefficient of inequality across different provinces and there is continuous talk on how this can be broken.

Dr Mabugu responded that in the context of Chapter 11, one of the reasons why property prices increase is because a certain municipality would make a public investment in a particular area but that municipality in turn does not claw back any of the value that it has generated from that property or investment so it dissipates. So Chapter 11 essentially says that government (or the municipality) find a way to claw back the value from the public investment or even transfer the value to those who cannot afford accommodation or housing prices. How property prices are determined is still an on-going research and the FFC is considering calling on the Competition Commission to present some research on the determinants for property prices and why they constantly increase, and ascertain what cannot be explained by demand and supply in some instances. The argument is that out of the public investment, the value ends up in private hands and that value is not clawed back from the investments. In order for this to happen, FFC will need to consult the Competition Commission and SALGA.

On Special Economic Zones, he agreed with the assessment of Prof Plaatjies. The reason people continue to flock to urban areas is perhaps due to the high rate of absorption in urban areas although unemployment is high, as well as the chance of landing a job is much higher compared to rural areas as people perceive. There are two obstacles to rural areas, the first being connectivity – which is very poor, so if investments can address connectivity in rural areas, some of the problems and challenges could be eliminated. The second factor is leveraging on the assets of rural areas, such as land and minerals. There is a lot of agricultural land in rural areas but there is no legitimate rigid and structured programmes to utilise that land and leverage it. Urban youth unemployment in SA is much higher compared to other countries with similar economies. The one major difference that causes this to be a factor is that young people have lost interest in land and agricultural activities – these are more labour intensive, this is one of the big explanatory variables on why SA youth face higher unemployment. They have been disconnected to the land and they no longer want to reside closer to where land is abundant.

FFC has not yet done a study on why people in Tshwane are not utilising the bus (BRT) services system, perhaps it is a design problem i.e. the system is not designed in a manner that people would conveniently use it or connect people to their destinations. FFC has focused more on whether financial reasons explain why the other nine major cities who do not have transport system coverage, are failing. Out of the funding reasons the FFC found that the funding gap was an issue as explained by capital gap shortage and operational gap shortages. As a result, national cannot take itself out of the equation for addressing public transport within large cities.

On whether the 9.1% funding of local government is adequate given what they have to deliver, at the moment FFC has concepts on how is going to tackle the question and it will be collaborating with SALGA on this question.

On EPWP, FFC agrees that it is a short term measure. However, it argues that out of the short term facility put in place there is a disproportion of utilisation of that facility where metros are utilising it much more than the large cities and secondary cities. Within that resource envelope, there is an argument on why that facility is not utilised with the understanding that it is a short term measure. They do not utilise it but they should be utilising it particularly when some of the problems within these B1 and B2 municipalities are speaking to the problems of some people’s inability to put food on the table.

Prof Plaatjies added that the idea of the EPWP within the ambit of a municipality is to expand its working operations to include people that are unemployed and under-employed. What has happened in many instances is that the financial arrangement is constrained in many ways in innovative thinking. Back in the days the council would employ people within their communities to perform basic service delivery needs and in that way the programme is re-investing in its own communities. Through that investment the money would be recycled and other things would further be developed. Therefore, there is no return in the investment on the EPWP programme any more.

On the lack of utilisation of the bus service system in Pretoria, in many countries in the world it is inter-modal where users of public transport have one ticket for various transport systems. The important question to ask the nature and extent of public transport in South Africa, because there is a notion that the taxi system is public transport but that is not the case because that system is not owned by the state. That is private transport, privately owned delivering a public service, so government needs to take this into account in dealing with the problem.

On broadband, Dr Mabugu replied that FFC submitted a recommendation in 2016/17 where it was essentially arguing along the lines that Members have expressed. What has transpired is that government has not responded to that recommendation because FFC works in a three year time line. That recommendation has not yet been implemented. Therefore, FFC is waiting for government to yet respond to it and FFC will come back to report on the response.

On the IUDF question about lack of funding and reasons for poor performance and adequacy of the policy, Dr Ntshakala replied that taking lessons from the urban development framework of 1997 that preceded the integrated urban development framework, the former had aspirations to address urban issues around poverty, inequality and unemployment. However, the study found that because it has inconsistencies in coordination, the lack of a specific implementation plan and no funding instrument, those aspirations were not realised. The integrated urban development framework touches on a number of issues that are not just for COGTA, as the coordinating department, but it touches on integrated human settlement, transport, integrated infrastructure network and economic diversification and inclusion. Therefore, it needs proper coordination and taking lessons from the predecessor, the study realised that the IUDF also does not have a specific funding instrument but is funded by various departments responsible for the key things covered in the IUDF. Hence, the study says coordination and monitoring are key for the IUDF to realise its aim.

Prof Plaatjies noted that some of the questions will be responded to in writing particularly the question on Special Economic Zones in rural areas because it needs a more comprehensive and factual response.

The meeting was adjourned.