Division of Revenue Amendment Bill: National Treasury briefing

Meeting report

Co-Chairperson De Beer opened the meeting saying it was a joint meeting of the Select and Standing Committees on Appropriations to get a briefing on the Division of Revenue Amendment Bill.

Mr O Terblanche (DA; Western Cape) raised an objection against the joint meeting because they had not received the Bill and the NCOP cannot consider and be briefed on legislation that has not been referred to it. He recommended separate meetings and that only the meeting of the NA go ahead. He also handed a letter Co-Chairperson De Beer for his consideration.

Co-Chairperson De Beer noted the objection. The NCOP would be referred to on 14 November. The same situation happened last year and there was a legal opinion that stated that no decisions regarding the NCOP can be taken on the Bill until it has been referred, but they can get the briefing. While the objection had been noted, the briefing would go ahead. The Standing Committee would go ahead with its process of holding a public consultation the following day. On 17 November, negotiating mandates will be sent from the provincial legislatures to the NCOP and there will be a meeting on 17 November by the Select Committee on Appropriations. On 21 November the final mandates will be dealt with and thereafter would go to a plenary in the NCOP for the Bill to be considered.

Presentation by National Treasury

Ms Malijeng Ngqaleni, Deputy Director-General: Intergovernmental Relations, National Treasury said the 2017 Division of Revenue Act (DoRA) was signed by the President on 30 May 2017 and it was Act No. 3 of 2017. It provided for the equitable share and conditional grant allocations to provinces and municipalities and sets out the rules for those grants. The Division of Revenue Amendment Bill (DoRAB) made amendments to the DoRA. Section 12(4) of the Money Bills Amendment Procedure and Related Matters Act required that the Minister of Finance table a DoRAB with the revised fiscal framework if the adjustments budget effected changes to the DoRA. The changes allowed in an adjustment budget are relatively small and included unforeseeable and unavoidable expenditure; emergencies; utilisation of unspent funds; and roll-over of unspent funds.

Adjustments to the Provincial Conditional Grants

R19.8 million would be added to the comprehensive HIV, AIDS and TB grant for Limpopo and Mpumalanga in order to support the national response programme and arrest the recent malaria outbreak. R30 million of the Health Facility Revitalisation Grant (HFRG) would be converted from schedule 6 Part A to Schedule 5 Part A for North West. Health infrastructure projects that were previously funded through indirect grant would now be implemented by the North West Provincial Department of Health. R415 million in unspent funds had been declared as savings on the indirect school infrastructure backlogs grant due to poor spending performance as a result of delays in appointing contractors, finalising the merger and rationalisation of schools in the Eastern Cape.

Adjustments to Local Government Conditional Grants

R27.9 million will be rolled over for the municipal demarcation transition grant for funds originally located to municipalities in KZN in 2015/16. The funds were rolled-over in 2016/17 as an indirect grant but went unspent and in 2017/18 they will now be rolled-over as a direct grant.

Additional Allocation to Support Disaster Relief and Recovery

R26.1 million has been allocated through the municipal disaster recovery grant for the repair of sinkholes and the damage to infrastructure resulting from sinkholes in the area of Merafong City Local Municipality (municipal disaster recovery grant is reactivated in the 2017 DoRAB). R200 million has been added to the indirect regional bulk infrastructure grant for Butterworth’s emergency water supply scheme to respond to drought pressures.

Additional Allocation for Bucket Eradication

R265 million will be added to the bucket eradication programme to allow the Department of Water and Sanitation (DWS) to continue bucket eradication projects already identified and committed to implementing.

Annexures to the Bill

Together with the tabling of the DoRAB, Treasury also submitted to Parliament proposed changes to the gazetted conditional grants frameworks and allocations. Section 16(2) of the 2016 DoRA required Treasury to consult Parliament on any proposed changes to a conditional grant framework for the purposes of correcting an error or omission. Parliament was asked to consider and approve corrections to the following conditional grant frameworks:

• Comprehensive HIV, AIDS and TB grant
• Health Professions Development and Training Grant
• National Health Insurance Indirect Grant: Health Professionals Contracting Component
• National Health Insurance Indirect Grant: Ideal Clinics Component
• National Tertiary Services Grant
• Substance Abuse Treatment Grant
• Corrections to Provincial Government Conditional Grants Frameworks

Municipal debt continued to grow and was made worse by the culture of non-payment. Debt at R128.4 billion was greater than the total local government grant allocation of R111 billion. Households owed R83 billion, commercial enterprises owe R27 billion and Organs of State owed R7.4 billion. Municipalities owed creditors significant amounts that threatened the livelihood of these suppliers. Collection rates for almost all municipalities were overstated and most municipalities have an operational deficit. The 37 municipalities that had deficits adopted unfunded budgets; 21 municipalities are not honouring their payment arrangements with Eskom with only 10 doing so; and 19 municipalities had budget surpluses.

Problem Statement

Some municipalities are failing at effectively delivering services because their billing systems are poor or inaccurate and, as such, they are failing to collect revenue that is due to them. Outstanding debtors are increasing, and they are not able to maintain positive cash flows to pay creditors within the stipulated 30 day period. Governance in these municipalities was weak with inadequate leadership and guidance.

Redistribution of Revenue

Most rural municipalities received twice the allocation per household than metros although 70% percent of tax revenue was raised in metros. Unfortunately the increase in allocations to rural municipalities has resulted in increased employee costs and sadly not higher service delivery expenditure. In 2011/12, employee costs as a percentage of total spending was 27.8% for municipalities, but this has increased to 33% by the end of 2015/16

Root causes of Municipal Liquidity Challenges

• Poor Leadership
• Misalignment of legislation between the Municipal Systems Act (MSA) and the Municipal Finance Management Act (MFMA)
• Clustering of dysfunctional municipalities
• Lack of service agreements
• Culture of non-payment

Possible Solutions

• Establishing control systems to ensure transparency and accountability
• Addressing the culture of non-payment
• Increasing the capacity of Municipal Leaders
• Increasing oversight by political leaders
• Enforcement of consequence management
• Improved coordination

Discussion

Co-Chairperson De Beer said Section 154 of the Constitution was also an important consideration and whenever he received letters from municipalities with difficulties, he would always ask the provincial leaders what they were doing about Section 154 of the Constitution. He referred to slide 27 of the presentation which he said was crucial as it contained recommendations of a strategic response from government. There must be an action plan and at some stage the recommendations would need to be discussed to restart the “back to basics” programme to re-initiate the municipal leadership about their role in management and governance. He advised provincial leaders in attendance to take note of the 20 municipalities from Free State, Mpumalanga, Gauteng, Limpopo and the North-West that were having financial and governance issues and that all 9 provinces would deal with that issue on Wednesday, 15 November.

Co-Chairperson Phosa said the allocation of resources to all three spheres of government was a critical step in the budget process.

Mr De Beer encouraged the provincial representatives to feel free to engage in the discussion.

Ms Phosa allocated numbers to the questioners:

A delegate from Free State Province asked what would happen concerning school infrastructure.

Ms Ncube from Gauteng Provincial Legislature referred to the root causes of municipal liquidity which had been mentioned in the presentation; in particular the culture of non-payment and the observation that past initiatives had not achieved the desired results. She asked that given the high rate of unemployment, with Gauteng having a 23.7% unemployment rate and a lot of people living below the poverty line, what advice would Treasury give to municipalities on how to collect money from people who did not have money and basically relied on services provided by the municipalities such as nutritional programmes for school going children.

Mr Terblanche thanked Treasury for their comprehensive presentation. He complained however that he found it difficult to follow the presentation because the equipment in Parliament did not work well. He said he understood the principle of reallocating money from one municipality to another if they could not spend it. He was, however concerned that the people from whom money was taken would remain without the required services and his appeal was that they needed to find a way of helping the municipalities to spend money allocated to them. Additional funding had been made available for emergency water and he asked if additional money would be allocated to the Western Cape.  

A delegate who did not state where he was from said addressing issues of governance and leadership was the starting point of any intervention, because even if other issues are addressed, nothing would succeed without good governance.

Mr Khumalo from the Gauteng Provincial Legislature said the picture that had been portrayed was that there was a leadership crisis if 20 municipalities were having liquidity problems. Ordinary people were in trouble, especially those from rural areas, and he agreed that they needed to go back to the basics. Part of the problem was that Treasury focused on MECs and did not focus on the rural areas.

Ms Ngqaleni said on the issue of infrastructure grants, it meant that the money would go back to the revenue fund which was needed to reduce debt, especially in the constrained fiscal environment. On unemployment, she said some municipalities actually provided services that went beyond what was provided for in the equitable share regarding utilities. It was 6 kilolitres of water and 50 kilowatts for electricity and municipalities that decided to go beyond the basic services would have to pay for these extra services from their self-generated income and some have got into financial difficulties by providing services that exceeded what they are funded for. On the poor performance of municipalities, she said Treasury tried to give support to the extent that was possible although the capacity of Treasury was limited because there were so many municipalities and it was not always possible to micro manage municipalities.

Ms Wendy Fanoe, Chief Director: Policy and Planning, National Treasury, on the perception that Treasury gave more support to the larger municipalities than the smaller municipalities, said Treasury had provincial divisions that also assisted in monitoring the municipalities and that NT was providing capacity building support to the provincial treasuries to enhance their monitoring and oversight over the municipalities. They were doing an exceptional job and grant level support was actually provided to the municipalities by the provincial treasuries. On the water challenges in the Western Cape, she said Treasury was following up on the matter with the National Disaster Management Centre and has done a draft assessment in some of the municipalities in the Western Cape. There are prescribed processes that needed to be followed in order to release money for disasters and the first step was for a province or a municipality to be declared a disaster area as prescribed by the National Disaster Management Act.

Co-Chairperson De Beer said he was aware that government received an additional R8.4 billion which includes 49.8 million for conditional grants to provinces and allocations for grants to local governments and then R994.8 million for State debt costs. He asked Treasury to address that. On the reported misalignment of legislation between the MSA and the MFMA, he asked what Parliament could do to address that. The responsibility of Parliament was to deal with legislation and if the two pieces of legislation were in conflict then they needed to be corrected. On unfunded budgets, he expressed astonishment that a mayor or a municipality could table a budget that was not funded at a council meeting. It did not make sense and could not be allowed. He asked what the purpose of all the workshops that were being conducted on financial training was. COGTA and Treasury would have to be called on to to get a progress report on the back to basics programme. He also requested the provincial leaders present to also invite the South African Local Government Association (SALGA) to their meeting on 15 November.

Co-Chairperson Phosa said the other concerning matter was the roll-over for two consecutive years. She asked whether there was compliance with legislation. The budget principle was that you roll-over funds that are committed otherwise the unused funds has to be surrendered. She asked Treasury to elaborate on that point. 

Mr David van Heerden from the Free State Provincial Legislature, said the Free State owed Eskom more than R4 billion and that the interest was more than R20 million per month. He agreed with Treasury that the two things that must happen in the Free State is political intervention and consequence management. He cited Mafube Municipality that has a municipal manager who has been on suspension for three years and still got paid while nothing was happening. It was important to get political intervention in the municipalities. He complained that there were action plans in the Free State but that nothing was happening

A delegate from the Free State contributed on the non-compliance with the MFMA. She said apart from maladministration, the other concern that needed addressing was the capacity of the municipalities. She agreed with Mr De Beers that COGTA and SALGA needed to assist with capacity building of the administrators. In terms of the law, districts are supposed to assist and coordinate the activities of the local municipalities, but sometimes the districts do not have that capacity, and other times local municipalities have better capacity than the districts, yet Treasury still sends money to those districts. She asked why money was still sent to municipalities that are dysfunctional. It was illegal to have an unfunded budget and she asked how councils approved such budgets.

Ms Ngqaleni said the challenges arising from the misalignment of the legislation was because the MSA came before the MFMA and that it was important to include some financial management issues in the MSA like audit outcomes and tariff settings. She also suggested reviewing the MFMA to take into consideration some of the provisions in the MSA. On the roll-over for the municipal demarcation transition fund for KZN, she said the problem was a systemic problem as the funding was done indirectly and there were problems in releasing those funds so the grant would be done directly to avoid disadvantaging KZN and they would be given a direct grant.

Ms Fanoe said funds could only be rolled over once but if there were mitigating circumstances they could be rolled over another time.

Co-Chairperson Phosa thanked everyone and she proposed that in future SALGA be present at the meetings.

The meeting was adjourned.