2017 MTBPS: South African Local Government Association (SALGA) briefing

Standing Committee on Appropriations

01 November 2017
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The South African Local Government Association (SALGA) briefed the Joint Committee on the 2017 Medium Budget Policy Statement (MTBPS). SALGA noted that economic growth generated the tax revenue that allowed the rollout of housing, water and sanitation, health services, education and many other services that government provided. Growth was, therefore, a precondition for local government to deliver on the promise for a better life for all. Disappointingly, between 2010 and 2016, the level of economic growth had compared very poorly against National Development Plan ambitions.

Areas of concern and future endeavour for SALGA included (i) sufficiency of the municipal funding model; and (ii) ballooning debt owed to municipalities. With regard to the equitable share, it was reported that the discussion on the adequacy of the funding of local government had been around for some time, without resolution. Though nominally the allocations to municipalities had been increased, in the recent past local government had received only 9% from the fiscus, projected at 9.2% in the current MTBPS. SALGA noted that municipal debts had been escalating, as indicated in various reports. Debts owed to municipalities as at 30 June 2017 stood at R128.4 billion, of which R24 billion was deemed realistically collectable in under 90 days. Unemployment had serious implications for municipal debt. By June 2017, the unemployment rate had increased by 1.2 percentage points and increased by one percentage point year on year.

SALGA noted that the audit outcomes at the beginning of the term had reflected that only 16 auditees had received unqualified opinions with no other matters or clean audit opinions, while the number at the end of the term improved to 66 auditees. SALGA made observations on debt impact issues, including tax laws, Supply Chain Management regulations, code of conduct for municipal employees, code of conduct for municipal councillors, an absence of revenue collection instruments and dedicated agencies, collectability of debts and a national campaign for municipal revenue enhancement.

SALGA identified a number of issues to be addressed: the Local Government Equity Share vertical formula and its underlying assumptions; innovative solutions for dealing with ballooning debt owed to local governments; innovative revenue enhancement tools for municipalities; escalation of capacity building and waste reduction, improvement of accountability through the Auditor General’s Office, and engagement on cost containment measures.

Members welcomed the presentation and stressed the need to ensure consequence management for transgressors. Members wanted to see the value for money. Members posed questions on the difference between bankruptcy and insolvency, on the collection of debts, on the settling debts of Eskom and government departments, and on local economic development.  

Meeting report

Welcome and apologies
The Chairperson noted that the MTBPS was very important to South Africa’s budget processes. The Committee was aware that the allocation to local government was aimed at subsidising services for low income households. To get there, infrastructure was needed. The 2017 MTBPS stated that, like the rest of government, municipalities faced fiscal difficulties despite the rise in the demand of the services. The lack of economic growth had put a strain on consumers’ ability to pay for services. However, citizens were in great need of seeing visible changes and improvement in the quality of their lives.

Briefing by SALGA
Mr Mohammed Lorgat, Director: Municipal Audit Support Programme (MASP) noted that the MTBPS reinforced the principle of open and accountable fiscal and budget processes in South Africa and that SALGA welcomed the opportunity afforded to local government to make inputs on the statement presented by the Minister of Finance.  SALGA took cognisance that economic growth generated the tax revenue that allowed the rollout of housing, water and sanitation, health services, education and many other services the government provided.  Growth was therefore a precondition for local government to deliver on the promise for a better life for all. Disappointingly, between 2010 and 2016, the level of economic growth compared very poorly against National Development Plan (NDP) ambitions.

Mr Lorgat noted that SALGA’s areas of concern and future endeavour included (i) sufficiency of the municipal funding model; and (ii) ballooning debt owed to municipalities. With regard to the equitable share, it was reported that the discussion on the adequacy of the funding of local government had been around some time, without resolution. Though nominally the allocations to municipalities had been increased, over the recent past local government had received a conservative 9% from the fiscus, projected at 9.2% in this MTBPS. Local government had the smallest share of the division of revenue, even after the Conditional Grant had been included. With regard to the debt owed to municipalities, he noted that over the years, municipal debts had been escalating as indicated in various sections of the Municipal Financial Management Act (MFMA) Quarterly Reports and the State of Municipal Finances Reports. The escalation was despite various measures undertaken by municipalities to collect due revenues and implementing their credit control systems, various amounts being written off as uncollectable debt, and national campaigns such as Masakhane and Project Viability.  In 2015 Cabinet had instructed all provincial treasuries and national government departments to sort out and pay their municipal accounts.

Debts owed to municipalities as at 30 June 2017 stood at R128.4 billion, of which R24 billion was deemed realistically collectable in under 90 days. Unemployment had implications for municipal debt. By June 2017, the unemployment rate had increased by 1.2 percentage points and had increased by 1 percentage point year on year. Unemployment contributed to poverty and 30 million South Africans were languishing in poverty. That also talked to the 18.1 million social grants beneficiaries, which, in turn, talked about the state of household indebtedness in terms of their municipal bills. The most recent release of the Non-financial census of municipalities (NFCM) report by Stats SA showed an increase in the number of indigent households across the country.  South Africa’s 278 municipalities registered 3,56 million indigent households in 2016, the highest number on record since figures were first published by Stats SA in 2004.  

With regard to the Municipal Audit Support Programme (MASP), Mr Lorgat noted that audit outcomes, at the beginning of the term, had reflected only 16 auditees who had received unqualified opinions, with no other matters, or clean audit opinions while the number at the end of the term had improved to 66 auditees. Noted in the audits were observations on debt impact issues, including tax laws, Supply Chain Management regulations, code of conduct for municipal employees, code of conduct for municipal councillors, absence of revenue collection instruments and a dedicated agency, collectability of debts and a national campaign for municipal revenue enhancement.

In its recommendations, SALGA noted the following with a view to addressing identified issues: the Local Government Equitable Share vertical formula and its underlying assumptions; innovative solutions for dealing with ballooning debt owed to local governments; innovative revenue enhancement tools for municipalities; escalation of capacity building and reduction of waste, improvement of accountability through the Auditor General’s Office and engagement on cost containment measures. In conclusion, the Committee was asked to deliberate and provide guidance on the said recommendations.

Discussion   
Mr B Topham (DA) asked SALGA to define the difference between bankruptcy and insolvency and to explain when a municipality could be classified as insolvent or bankrupt.

Mr F Essack (DA) asked what SALGA was doing to make sure that competent and qualified municipal managers were employed.  In terms of performance, he asked what SALGA’s take was on the performance of municipalities and what the role of SALGA was in the ESKOM debacle in relation to money owed by municipalities. What was SALGA suggesting on the issues involving South Africa Revenue Services (SARS)?

Mr T Motlashuing (ANC) welcomed the presentation. Referring to the fiscal consolidation and debt containment, he said that he would have expected SALGA to reflect on the consequence management. In the presentation, SALGA did not express its role in the provincial governments towards capacitating municipalities. He said that he was disappointed. The disappointment reflected the view by SALGA that the allocations were not enough, even whilst money was being returned to the National Treasury. That had a serious impact on the allocations of budget on the one hand, and the Annual Performance Plan on the other. Referring to the equitable share formula, he noted that it had been indicated that there was a need for a review of the Annual Performance Plan because its implementation was a challenge. However, no suggestions or proposals had been put forward by SALGA. Referring to the difficulties in collecting debts, he asked what the municipal policies were in terms of debt collection methods. If those methods existed, were they implemented? Municipalities ought to have the capacity to collect debts to ensure that they were sustainable. He remarked that SALGA had not talked about how the municipality would be self-sufficient in terms of human and financial resources. Previously, there had been economic growth of 5%. However, without conducting any study on why the economic was growing, this pace of economic growth had been called a failure, resulting in the introduction of other economic interventions. He asked whether there were correct methodologies or interventions that could turn around the municipalities.

Mr A Shaik Emam (NFP) remarked that municipalities collected revenues very poorly and asked whether any study had been done on the collection of revenue to determine what type of debts were not collected. Was it water or electricity debts? In his view, the most uncollected debts were those relating to properties. It should be made clear which debts it was difficult to collect. What role did SALGA play in ensuring that business was taken to municipalities so that employment could be created? How was SALGA measuring expenditure to see that they were getting value for money?

Ms D Senokoanyane (ANC) said that there was a challenge with the expenditure of money and asked what the reasons might be behind improper management of finances. She asked for a breakdown of how money allocated to municipalities was spent. Referring to the issue of the state departments that owed municipalities, she asked whether there was a mechanism of collecting debts. Why were businessmen not paying municipal services? On the issue of unemployment, she said that the number of unemployed was going up and asked what SALGA was doing to ensure that the number decreased.

Ms M Manana (ANC) welcomed the presentation and said that next time the number of power points should be indicated. On the question of job creation, she said that the Department of Cooperative Governance and Traditional Affairs (COGTA) had declared R250 million for work programmes and thus asked whether the phases of the work programmes had been rolled out. The presentation did not say anything about it. With regard to budget, she asked whether SALGA understood that local government had to play a major role in the realisation of the NDP.
 
Mr N Gcwabaza, referring to the uncollected municipal debts, remarked that there had been no positive reaction; hence modern technology was not used to collect the revenue. He felt that modern technology could be used in the collection debts. He believed that method would reduce illegal collections of the revenue. Although he had suggested the use of modern technology, he wanted to know the real problem behind the collection of revenue. He added that local economic development was another issue. There was no coherent strategy to ensure that local economic development was taken forward. The Equitable Share Formula could be talked about but it would not achieve its goals if the money was not used for the purpose of local economic development.

The Chairperson asked whether SALGA had a monitoring and evaluation structure to monitor municipalities on a quarterly basis. She raised her concerns over the lack of a water policy in certain municipalities that could have ensured that the water infrastructure was maintained. She was also concerned about the lack of a revenue collection strategy.

Mr Lorgat responded to the questions. On the differences between insolvency and bankruptcy, he said that those concepts were similar. Bankruptcy indicated that a municipality had no money to pay what it owed and insolvency indicated that a municipality’s liabilities exceeded its assets. On the question of Eskom, he said that SALGA had been involved in those matters and had provided some interventions, along with the National Treasury. Two years previously, there had been interventions relating to the equitable share formula. SALGA and National Treasury had engaged with 52 municipalities with a view to identifying what the main issues were and to determining arrangements for how those municipalities to settle their debts. It was not a simple process because these were a lot of complexities in the process. For example, Eskom provided electricity directly to consumers in some instances, whereas in other municipalities, electricity was provided through municipal structures. There was also inconsistency in the way that Eskom treated municipalities insofar as the Public Finance Management Act (PFMA) was concerned. According to the PFMA, debts should be settled within 30 days. Eskom had concluded an agreement for debts to be settled within 15 days. On the issue of maintaining water infrastructure, he responded that the issue was a difficult one. It was difficult because it was dependent on whether consumers were paying services and their debts.

His colleague from SALGA stated that integral to all of the problems was a matter of capacity. It would be difficult to turn the municipality around if the municipality did not have sufficient capacity. SALGA was attempting to ensure that municipalities had capable management with competent staff. SALGA had established a unit that worked with municipalities on competency assessment. There were also collaborative initiatives between SALGA and COGTA nationally. SALGA made sure that competent senior managers were recruited.     

The Chairperson asked for the list of bankrupted municipalities in order to find a solution to the matter. What measures had been put in place to make sure that the R24 billion of revenue was collected? What was the role of SALGA in ensuring that water structures were able to deliver water services to consumers?

The Chairperson said that those difficult questions should be responded to in writing.

Mr Lorgat said that SALGA would provide a list of municipalities that were bankrupt. He added that SALGA had engaged with government departments to motivate them to make payments. Some municipalities had a revenue base, whereas others did not.

The Chairperson appreciated the full participation of Members and welcomed the presentation. SALGA was an important body which should ensure that municipalities were capable and accountable. It ought to ensure that there was consequence management for transgressors. The Joint Committee wanted to see the value for money.

The meeting was adjourned.  

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