Division of Revenue Amendment Bill: public hearing

Standing Committee on Appropriations

10 November 2017
Chairperson: Mr C De Beer (ANC) and Ms Y Phosa (ANC)
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Meeting Summary

Two submissions were presented on the Division of Revenue Amendment Bill at the public hearing before the Select and Standing Committees on Appropriations. The first submission came from the Rural Health Advocacy Project (RHAP), which to the surprise of Members, focused on the national and provincial funding mechanisms, rather than the situation in rural areas. In defence of its submission, the Rural Health Advocacy Project contended that the decisions that were made at national and provincial levels were the ones that had an impact on rural health. RHAP called for increased funding to the health sector and urged government to assist medical institutions to settle accruals, as they were not just caused by administrators not complying to regulations, but that they were also a result of dysfunctional systems at provincial level where incremental budgets were used. It called for prioritisation of not just the recruitment of medical personnel but also administrative personnel, arguing that issues of fruitless, irregular and wasteful expenditure often arose because of the shortage of administrative staff. It observed that while funding for programmes like HIV/AIDS and TB was increasing, the number of staff was decreasing. This compromised the administration of these programmes because the resources were outstripping the staff which resulted in money being unspent.

Members expressed disappointment that the submission from Rural Health Advocacy Project did not contain solutions to the shortcomings it experienced in the system. Members asked what should replace the current Equitable Share Formula? Members argued that as stakeholders, RHAP needed to assist Parliament to come up with alternatives to improve service delivery.

The second submission came from the Department of Cooperative Governance and Traditional Affairs (COGTA). It outlined the role of COGTA in assisting municipalities in corporate governance and in structural or organisational adjustments, in addition to building the capacity of staff in local government. The submission mentioned some of the major weaknesses in municipalities such as the failure to execute projects and expend allocated funds, incapacity to collect and raise revenue, contraction of debt and vacancies in crucial positions. COGTA reported that a lot of senior managers were not confirmed which compromised the Department’s ability to make decisive decisions and give direction to its staff. They explained the measures that were being taken to address some of these such as the Back to Basics programme which was meant to give administrators the necessary skills required to manage their municipalities.

Members asked COGTA why previous interventions that were undertaken to arrest the dysfunctions in the municipalities failed to yield positive results. Members also asked COGTA if it could give assurance that the disagreement on the modality of spending the indirect grant, which was rolled-over in 2016/17, was resolved.

Meeting report

Opening remarks
Co-Chairperson Phosa welcomed the Members of the Select and Standing Committees on Appropriations to their joint meeting which was intended to receive public submissions on the Division of Revenue Amendment Bill (DoRAB). She also welcomed stakeholders such as National Treasury and those that were due to present. She said that the Constitution provided for public participation so that public policy and legislation could reflect the will of the people. An active civil society was an important element of a democracy. The input from the public was highly valued and she was looking forward to a constructive engagement.

Rural Health Advocacy Project
Mr Russell Rensburg, Programme Manager: Health Systems and Policy, RHAP, said his presentation would focus on the Medium-Term Expenditure Framework, the DoRAB and how it would impact on rural health.
He said that Section 27 of the South African Constitution recognised the right to health as a basic human right. Since 1996, significant strides were made in realising this right. Over 3.5 million people was enrolled on life saving Antiretroviral (ARV) treatment and mother to child transmission of HIV was virtually eliminated. Supported by increased investment during the period 1996 to 2015/16, expenditure grew from R18 billion to over R220 billion. Health expenditure was expected to grow in real terms by about 1.3 percent between 2017 and 2020. However, there was a downward trajectory since 2012. Key findings included critical vacancies not being filled, essential equipment not being maintained or procured, centralisation of authority to political heads, poor financial management and the rising burden of non-communicable diseases.

He said that the Medium-Term Budget Policy Statement (MTBPS) introduced in a time of continued low growth, rising debt and increased poverty and inequality. This uncertainty brought about by the downward revision of economic growth. The revenue shortfall of R50 billion was expected to grow to R160 billion over the next three years. He said that analysts predicted further ratings downgrades, major capital flight, resultant currency risk, increased interest rates and slower economic growth. It was too soon to tell, but not too late to consider appropriate policy responses.

He highlighted that the National Department of Health performance showed that 99 percent of the budget was spent, yet only 55 percent of targets were met. The main driver of the underperformance was the Health Facility Revitalisation Grant. Only 37 of 307 targeted facilities outside of National Health Insurance (NHI) districts were refurbished which was a 12 percent achievement rate. All the money, however, was spent. MTBPS allocations to Health registered a 7.5 percent increase in nominal terms but translated into a mere 1.5 percent when inflation was taken into consideration. He said that conditional grants might no longer be fit for purpose and there might be a need to consider how best the funds could be used.

He said that a successful ward based outreach programme was key to transforming the national health system from largely curative to a Primary Healthcare (PHC) approach that prioritised prevention and health promotion. The introduction of a funding source for a standardised integrated community health worker programme was long overdue. Unfortunately, the current allocation of R1.4 billion was only a fraction of the resources required. The Medical Research Council (MRC) needed an additional investment of R4 billion per annum and funding of the shortfall had to be prioritised. He said that an investment in the Community Health Worker (CHW) programme would save costs.

He said that the Provincial Equitable Share Fund, flawed though it may be, did take into consideration the developmental obligations. As it was unconditional, provincial legislatures had significant discretion in allocating resources. This often led to significant under-funding of core services, especially in rural areas. Social services made up 80 percent of the provincial equitable share. He noted that only Gauteng, Western Cape and KZN allocated more than the benchmark of 30 percent to health expenditure. He explained that the under-funding created significant challenges and often resulted in growth of under-funded commitments or accruals. Accruals across provincial departments exceeded R13 billion. Since 2012, there was a steady decline in health posts. Between 2006 and 2012, human resources were increasing by 10 000 posts per year, but between 2013 and 2016, 5 500 posts were lost and over 45 000 posts were frozen. When the vacant posts were combined with the additional posts required, the shortage of critical health posts came to 75 000.

Recommendations from RHAP included:
Review current conditional grant architecture to prioritise funding to immediate needs
Prioritise the creation of a grant to directly fund district health services as this would support the implementation of a decentralised district health system as envisaged by the NHI policy document
Immediate reprogramming of unspent funds and roll-overs to support the funding of accruals and the strengthening of district health management
Prioritise the protection of critical health posts
Fund a health system wide organisational capacity assessment which included Human Resources for Health (HRH) distribution and suitability of health infrastructure
Support the development of a costed prioritisation plan

COGTA
The second submission was made by the Department of Cooperative Governance and Traditional Affairs (COGTA). The Acting Director-General, Mr Tebogo Motlashuping, made the presentation. He said that the Department supported the roll-over of funds for the municipal demarcation transition grant and additional allocations to support disaster relief and recovery. An amount of R27.9 million was rolled-over for municipal demarcation transition grant for funds originally allocated to municipalities in Kwazulu Natal in 2015/16. These funds were initially rolled over in 2016/17 after the funds was converted from a direct to an indirect grant allocation at the end of 2015/16. However, the conversion happened very close to the end of the financial year, leaving too little time for the funds to be spent. He said that the funds were rolled-over in 2016/17 as an indirect grant but went unspent as the modality for spending them as an indirect grant could not be agreed upon. In 2017/18 it would now be rolled-over as a direct grant and transferred to municipalities to reimburse their expenditure incurred in line with the conditions of the grant in preparation for the municipal mergers that came into effect in August 2016.
He noted that R26.1 million was allocated for the repair of sinkholes and the damage to infrastructure in Merafong City Local Municipality. These funds would be allocated through the municipal disaster recovery grant. The restoration of municipal infrastructure to functionality following a disaster was an important aspect in ensuring the continued provision of basic services by municipalities. COGTA supported measures to address the Butterworth emergency supply scheme drought pressures through the Department of Water and Sanitation.

He said that the Back to Basics (B2B) programme was launched in September 2014. Support and intervention measures had to practically respond to addressing existing weaknesses, improve and strengthen oversight and accountability mechanisms. It was based on the foundation of doing the basis right by:
Putting people first by engaging with communities
Effective delivery of services
Good governance
Sound financial management
Building institutional capabilities to ensure the living conditions of communities are improved.

He noted that in 2015/16, 2 135 service delivery protests were recorded of which 945 were violent. Gauteng and the Western cape had the largest number of violent protests. The increase in service delivery protests occurred irrespective of the public participatory meetings. He highlighted that well maintained water and electricity distribution infrastructure was central to economic production and attracting businesses to articular localities, with the spin-offs of more jobs and a larger municipal tax base.

He said that challenges were still experienced across the infrastructure development life cycle in municipalities, namely, project identification, infrastructure planning, financing, construction to operations and maintenance. Some of the root causes remained weak institutional capacity and the shortage of skills, that all impacted on the ability to plan for operation and maintenance of infrastructure. Revenue and expenditure were the two sides to municipal sustainability. Urban municipalities derived most of its revenue from property rates and user charges while rural municipalities relied on intergovernmental transfers. National Treasury identified the following common challenges in financially distressed municipalities:

  • An increase in the number of acting municipal managers and chief financial officers
  • Poor cash flow management and reliance on conditional grants
  • Low capital spending on infrastructure and inadequate provision for repairs and maintenance
  • Increases in debtors and creditors
  • Lack of credible budgeting
  • Ineffective governance structures

He explained that the on-going instability in senior management positions had a negative impact on service delivery. This could be seen, for instance, in the inability to make basic managerial decisions such as the appointment of service providers. New administrations under new political leadership usually introduced revised five-year strategies that were driven by new managers and financial officers. A total of 90 new appointments were made in the first quarter of 2017/18.

With regards to revenue and debt collection strategies, the following support was provided to municipalities:
Review and update of revenue policies and by-laws
Billing (accurate reading of electricity and water meters)
Data cleansing and analysis
Indigent register management
Customer relations management
Administration

Achievements to date included:

  • Comprehensive revenue policies were reviewed, re-drafted and submitted to councils for approval
  • Monthly financial reports on revenue performance were produced and submitted to management for decision making
  • There was a good interface between revenue management and credit control
  • Revenue collection rates increased in most municipalities
  • Billing systems were improved
  • Data cleansing was done in most of the municipalities

COGTA recommended that the Select Committee on Appropriations Local Government’s response on the 2017 DORA Bill noted the status of municipal performance, the intergovernmental co-ordination between the relevant entities as well as the revenue and debt collection strategies for municipalities.

Discussion
Mr O Terblanche (DA) said that in all the Committees oversights, the one common factor they faced was the inability of the people responsible for capital works to spend. He was glad for the interventions, even though he did not see a lot of improvements regarding capital works. He asked what interventions COGTA was making regarding capital works.

Mr T Motlashuping (ANC) said that he could not comment much on the first submission because one could not prove the authenticity of the information and statistics provided. He, nevertheless, expected more information concerning rural health as the name of Mr Rensburg’s organisation suggested but there was minimal information regarding rural health. He criticised Rural Health Advocacy Health Project’s general statement that the equitable share formula was not working. That was saying nothing. It should come with an alternative proposal and not just say it was not working. If one said something was wrong, one should provide an alternative as that would give the Committees some guidance in the reviewing of the equitable share formula for the allocation of resources. He would have asked more questions, but he had to depart. Addressing the COGTA DDG, he said the municipalities were performing poorly throughout the country on Municipal Infrastructure Grant (MIG) expenditure and he asked how COGTA was assisting in this respect and asked what strategies COGTA was employing to address the filling of critical posts.

Mr N Gcwabaza (ANC) asked COGTA if it could give assurance that the disagreement on the modality of spending the indirect grant, which was rolled-over in 2016/17, was resolved. Addressing the co-Chairpersons, he said that he appreciated the efforts that were being made at intergovernmental level to address some of the challenges that were being faced by municipalities. He, however, asked if there were timelines that were attached to the intergovernmental efforts. It would be interesting to find out the economic spin-offs of the interventions that were reported.

Co-Chairperson Phosa addressed her question to COGTA. She referred to the submission report that stated there were some municipalities that were still in dire straits, despite intervention measures being undertaken with examples that included Makana, Ngaka Modiri Molema, Thabazimbi, Ubuntu LM, eMadlangeni, Emfuleni, Mafube and Masilonyana. She said that the predominant challenges referred to unfunded budgets, low collection rates, bloated organograms, high turnover of senior managers, aging water and electricity infrastructure, lack of internal controls, no performance management systems, poor operations and maintenance, etc. She noted that COGTA also talked about action plans such as developing joint Back to Basics action plans and she asked whether there were any timelines to these action plans and when the people in the mentioned municipalities would see changes. The government was committed to improving the lives of the people.

Ms D Senokoanyane (ANC) addressed her first question to the Rural Health Advocacy Project. She said Mr Rensburg started his presentation quite well, but he diverted from rural health issues to general health issues. She asked him what he thought about the MTBPS concerning rural health services. She reflected that sometimes there were no staff in rural areas not because they were not assigned there but because no one wanted to go to the rural areas. She wished he discussed real rural issues that were related to the budget. On his suggestion that accruals should be paid for and adjusted taking into consideration accruals, she corrected him that accruals were the fault of someone and should not be entertained. Someone had to take responsibility for incurring them and it was not right to fund accruals. Responsible officers had to account for the accruals as there were regulations that governed such matters. She expressed disappointment that COGTA did not say much about the MTBPS even though the headings in their document gave that impression. She, however, referred to the roll-over of R27.9 million that was earmarked for the municipal demarcation transition and she asked for clarification on the information that the conversion from a direct grant to an indirect grant happened towards the end of the year and thus the money could not be spent.

Ms S Shope-Sithole (ANC) asked what Mr Rensburg meant when he said that there were many mission hospitals and that he suggested that there should be some consolidation of services so that they could improve. She said that the Eastern Transvaal was vast and rural, and consolidation would be a challenge when many people were unemployed and poor. She asked how they could possibly achieve that perfect health system. She felt it would put a lot of stress on the people who needed the services and please high society and find world class services. She said the focus should be on the poor. She also felt that South Africans lamented too much and that as far as she was concerned, they had enough resources in the budget and what they needed to do was to make sure that departments were held accountable. She disclosed that she was even trying to write a book about this matter and she pleaded that this lamentation had to stop and there was a need to appreciate that there were enough resources. All that was required was to stop the underspending, corruption, inefficiency in the execution of projects and encourage public participation in discussions about national development. She believed most of the people who were talking too much and complaining were actually the ones who were comfortable and had access to the media whereas the poor people themselves were not talking too much. She read out to the Co-Chairpersons a message from her phone: “There are more serious challenges in the world than we think. Today in Britain, they are even saying Theresa can you go for God’s sake”.

Co-Chairperson Phosa asked COGTA to comment on the findings of National Treasury regarding the root causes of municipal liquidity challenges. National Treasury cited the first root cause as weak leadership, ineffective councils and stated that accountability was weaker with acting municipal managers. The second root cause was the absence of or weak service level agreements where municipalities performed functions on behalf of provinces; misalignment of funding to the district and local municipalities; combining two dysfunctional or distressed municipalities did not produce a functional municipality; the misalignment and overlap of legislation between the Municipal Systems Act (MSA) and the Municipal Finance Management Act (MFMA) leading to the blurring of the functional responsibilities for local government performance, monitoring and oversight that was shared among national and provincial treasuries and COGTA, and, finally, the culture of non-payment. National Treasury reported that evidence showed that non-compliance to the MFMA and Public Finance Management Act (PFMA) was endemic across all spheres of government, and that past initiatives did not achieve the desired results. She asked COGTA to speak about these matters and how they perceived their role in arresting the situation. She also requested that COGTA clarify which strategies were working and which ones were not working in the intergovernmental strategies. On Mr Rensburg’s opinion that there was a need to review current conditional grant architecture, she asked what Rural Health Advocacy Project thought was the biggest challenge in the health sector.

Mr Terblanche requested National Treasury to clarify why funds were being rolled-over more than once.

Rural Health Advocacy Project responses
Responding to the Members’ observation that there was very little about his submission on rural health, Mr Rensburg said that he made a separate written submission which he submitted to the Committee prior to the hearing which contained detailed information on rural health. He said that the main aim of this presentation was to show that the country reached a point where there was a need to re-prioritise and re-strategise the health sector, especially because revenue was not likely to increase given the economic situation. He said that what he was presenting was more like a question: “Where do we go from here?” He said that the country could not continue doing the same things but expect a different result.

On Members’ scepticism regarding the statistics he presented, he said that all the information came from official reports from the Department of Health and were in the public domain. He said that he concentrated on the national and provincial level because that was where decisions that affected rural health were made and the system was looked at from a macro level. Concerning accruals, he agreed that officials had to take responsibility, but people were suffering. It was not just holding the officials to account that was required, but holding the whole system to account. He was not suggesting that rural facilities be nationalised but that there was a need to offer quality services and provide a system that supported that. People sometimes bypassed the rural clinics in preference for hospitals because they offered better services, but it cost them more and some were even opting out of care because they could not afford to go to hospitals.

On staffing in rural areas, he said it was not a question of people not wanting to go there, but that the system created hurdles which prevented people from filling the vacant posts. It took six months to fill a vacancy in the public sector. There was a concentration of delegations in political leadership where MECs had to sign off on appointments. It was not in their domain to come up with solutions but that in a situation where less than 50 percent of the targets were met but all the money was spent, there was a need to change the way things were done. Perhaps there was no need to build new clinics and new hospitals, but what might be needed would be to improve the services in the existing structures and to fill the vacancies that needed to be filled. The irregular, wasteful and fruitless expenditure was sometimes the result of there being no administrators. Doctors and nurses were prioritised, leaving out the administrators and accountants who needed to manage the resources prudently. The issue of accruals was complex because provinces were using incremental budgets and the administrators on the ground continued to spend because people kept going to the health facilities for services, and at the end of the day they ended up with deficits because the politicians at provincial level were controlling the budgets. Funding for certain services was being increased, like for HIV/Aids and TB, yet vacancies were being frozen affecting delivery of services.

COGTAs responses
In terms of interventions, COGTA’s role was to give support to municipalities regarding frameworks and legislations to ensure compliance, and to give management support. COGTA was mandated to give support to weak and dysfunctional municipalities. In the past, one of the interventions was withholding funding from municipalities that diverted funds, but the people were the ones who suffered. What it did was to identify those municipalities that were underspending, and engineers were being deployed to those areas to go and assist with the projects. In instances where local municipalities did not have the capacity to spend, the responsibility was assigned to district municipalities that had the capacity. Where the district did not have the capacity, the support of the Municipal Infrastructure Support Agent (MISA) was enlisted. Since the deployment of engineers there was an improvement not just in the spending, but also in the quality of work being done. Artisans were also co-opted for the maintenance of the buildings once they were built.

On the disagreement on modalities, the grant was meant for organisational restructuring of the municipalities that was amalgamated, addressing of disparities in salaries among employees, and to put in place all other systems. All provinces were affected by the re-drawing of new boundaries. The contention was on the conditionality’s of the release of those funds, but the issue was now resolved.

Regarding intergovernmental support, there was a realisation that the support that was given to municipalities in the past was not the right kind. Individuals were being sent to municipalities to go and resolve problems there, but this never worked. What was happening now was that the municipalities were being accorded multi-sectoral support through National Treasury, Provincial Treasury, Water and Sanitation, COGTA and other support teams. A rescue plan was devised with the affected municipality taking into consideration its specific challenges and a time line was set with achievable objectives. Financial recovery plans were drawn up in addition to the rescue plans which were closely monitored by the multi-sectoral support teams.

On economic spin-offs, some municipalities had very little economic activity going on, so it was difficult for them to be financially viable. As a result, there was a national energy forum which was being held to discuss some of these challenges which was being attended by the Energy Minister. Resolutions would be made at the forum on some of those matters. It was difficult for some municipalities to attract investment because there was no water, there were poor roads and basic infrastructure was missing. Interventions that were done in line with section 139 of the Constitution did not yield positive results as was the case with Makana which went back to the same problems it had previously before the intervention. However, those municipalities like Nelson Mandela that received multi-sectoral support yielded positive results.

On vacancies, the Department was just fresh from local government elections and most contracts of senior managers came to an end, so they were back to the cycle of people performing in acting capacities. Municipalities should begin the process of recruiting new officers before the term of office of office bearers came to an end. Unfortunately, for the first two years, most of the municipal leaders would be operating in an acting capacity which compromised the effectiveness of the municipalities. The uncertainty that surrounded administrators before elections also paralysed operations as no one wanted to be seen to be making mistakes. A compressed recruitment process of 50 days, as opposed to 90 days, was initiated which was oversaw by COGTA from the stage of advert to the stage of appointment and so far, there were no complaints about the competence of those who were appointed.

On the roll-overs, as indicated earlier, the main reason why there was more than one roll-over were because there was disagreement on the modalities of the disbursement of the grant funds. To improve governance, there was also agreement that organograms for municipalities of different sizes should be different as some did not need big structures. The organogram should suit the size and capacity of the municipality.

National Treasury
Ms Dumebi Ubogu, Director: Provincial Policy and Planning, National Treasury, responded to the question concern the equitable share. She said that the equitable share and the weights attached to the formula were meant to be blunt and not to be prescriptive, even though they were attached to education and health. It was not meant to be prescriptive in terms of how much each province should receive. When the funds went to the provinces, it was up to the provincial government to decide how much it should allocate to health and how much should go to education. That said, there was a review that was taking place and that review was on-going. It involved quite a number of stakeholders and part of the discussion was how services in the rural areas should be delivered.

Co-Chairperson De Beer requested Treasury to put its answers in writing to assist the Committees in its oversight and to assist them in the discussions that were coming up.

Co-Chairperson Phosa thanked all Members for their contributions, as well as the those persons who submitted from COGTA and Rural Health Advocacy Project.

The meeting was adjourned.
 

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