Division of Revenue Bill: National Treasury briefing

Standing Committee on Appropriations

08 March 2018
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

National Treasury briefed the Standing Committee on Appropriations on the 2018 Division of Revenue Bill. The Committee heard that despite the tough fiscal environment the budget still reflects increased allocations to national and provincial government, and that reductions in the budget related more to curbing the rate at which budgets were growing rather than cuts on essential public spending. There was growth in the equitable share to provinces and conditional grants. There was also an increased allocation to local government level.

However, in order to create funding space for free higher education and prevent spiralling government debt, Cabinet decided that Treasury needed to cut down expenditure in non-critical, non-service delivery areas at all levels during the next three years. Equitable share allocations for municipalities received minor cuts compared to conditional grants, in consideration of protecting service delivery programmes on nutrition, public transport and HIV/AIDS. There was a provisional allocation for drought relief. A new Municipal Restructuring Grant would be made available in 2019/202 to support struggling municipalities make the necessary reforms.

The presentation touched on policy changes in the Bill and monies owed by municipalities for bulk supply of water and electricity

Responding to the issue of non-payment of electricity and water, a member of the EFF took umbrage with the flagrant way in which this was presented to the Committee when this involved poor people who did not have money for basic amenities.  Other questions were asked about municipalities raising their own revenue from selling services, benchmarking of service charges to residents and pilot programmes. A concern was raised around the worrying tendency to pack local government with more responsibility without the commensurate funds. . A related concern was that by asking municipalities to generate their own income, and therefore pay their way, one might be putting them under pressure to accumulated crippling debt – how municipalities would service this debt was questioned.

Meeting report

Opening remarks

The Chairperson began by noting and welcoming her counterpart, Mr C De Beer (ANC), who chairs the Select Committee on Appropriations. The Chairperson said the Committee looked forward to hearing how more than half of national government’s revenue over the current Medium Term Expenditure Framework (MTEF) period would be transferred to the other two spheres of government, especially where the poorest parts were. This was in line with the strongly redistributive role of Treasury, which means shifting resources raised mainly from wealthy areas to servicing poor South Africans.  In addition, she anticipated that underspent budgets at provincial and local government level will be transferred elsewhere to those that need more money.

The Chairperson said the Committee was also keen to know which budgets had been cut, if at all, and what impact that would have on service delivery. Further, she observed that spending and overall financial performance of many municipalities was below par and it was hoped that the meeting would help the Committee acquire a good understanding of the situation in order to come up with quality recommendations in its report to the National Assembly on this matter.

2018 Division of Revenue Bill

Ms Majileng Ngqaleni, National Treasury DDG: Inter Governmental Relations Division,  began by declaring that the Division of Revenue process had been highly consultative, both at the Executive and legislative levels of government, including further instances of technical consultation, resulting in a consistently transparent and internationally acclaimed budget in which Treasury took great pride. Despite the tough fiscal environment of stagnant economic growth, the Department was happy to announce that the budget reflects increased allocations to national and provincial government, and that reductions in the budget related more to curbing the rate at which budgets were growing rather than cuts on essential public spending.

Equitable share to provinces had grown by 7.1 per cent and conditional grants by almost 6 per cent. Local government level received an average increase of 7.5 percent, mostly from the equitable share. More allocations could have been made had it not been for government’s commitment to servicing the national debt inherited from the Apartheid regime.

In order to fund free higher education and prevent spiralling government debt, Cabinet decided that Treasury needed to cut down expenditure at all levels during the next three years - a total of R53 billion at national level, R18 billion at provincial and almost R14 billion at local level. Equitable share allocations for municipalities received minor cuts compared to conditional grants, in consideration of protecting service delivery programmes such as nutrition, public transport and HIV/AIDS.

A provisional allocation of R6 billion was set aside for drought relief - this was on top of disaster relief allocations already in the budget: R423 million for provinces and R479 million for local government.

Against a background of annually increasing allocations to municipalities, it was realised that many poor municipalities are bloated because funds originally earmarked for service delivery ended up being used for personnel. It was therefore concerning, for example, that despite capacity support of R2 billion a year to municipalities, these entities still plead a lack of capacity.  A new Municipal Restructuring Grant will be made available by 2019/20 to support financially struggling municipalities in implementing recovery plans, but this was dependant on these municipalities showing a commitment to making necessary reforms.

Policy changes in the Bill include a review of the municipal borrowing practice of “pledging” against conditional grants from national government. The review envisages a more stringent process involving consultation with provincial treasuries and transferring officers and tabling of borrowing plans over and above the normal Municipal Finance Management Act (MFMA) regulations. Another policy change relates to “unfunded” and “underfunded” mandates where a responsibility for performing a function is assigned to a municipality without sufficient sources of funding.

Ms Dumebi Ubogu, National Treasury Director: Provincial Fiscal Framework, highlighted the correction of an error in the Early Childhood Development grant framework, where the threshold for the income-based means test was not updated to reflect the increase of the Child Support Grant from R380 to R405. National Treasury therefore requested both the Standing and Select Committees on Appropriations to recommend that this be corrected as part of the Gazette once the Bill is enacted.

In support of the Department of Basic Education and its Accelerated School Infrastructure Delivery Initiative (ASIDI), Ms Estelle Setan, Chief Director: Strategic Procurement, NT told the meeting that NT had issued Instruction 02 of 2015/16 which sought to manage and control costs of building schools to achieve value for money. It was now suggested that funds be shifted from ASIDI to the more direct Education Infrastructure Grant in order to fast-track outstanding projects.

Mr Jan Hattingh, National Treasury Chief Director: Local Government Budget Analysis, noted that as at 31 December 2017, monies owed by municipalities for bulk supply of electricity and water stood at R16.2 billion and R7.3 billion respectively. Political office bearers were tasked to take this matter forward through a Cabinet level structure, namely the Inter Ministerial Committee (IMC) chaired by the Minister of Cooperative Governance and Traditional Affairs (COGTA) and supported by the technical Inter Ministerial Task Team (IMTT).

On the other hand, during his 2018 Budget speech in the National Assembly, the Minister of Finance said the failure by government to pay municipalities for services rendered was a threat to municipal financial stability. He stated that National Treasury’s Director General had instructed all government departments and public institutions to pay suppliers on time (within 30 days) or be charged with financial misconduct.

Other areas covered in the presentation included:

  • A new grant to eradicate long standing backlogs in title deeds registration associated with past beneficiaries of state-subsidised housing
  • A Provincial Emergency Housing grant to allow the state to respond faster to housing emergencies
  • A change in the Equitable Share formula for the Education Component. The Department of Basic Education has upgraded its approach to collecting school enrolment figures from the old SNAP survey to the Learner Unit Record Information Tracking System (LURITS)
  • A summary of transfers to local government showed that additions to the local government equitable share over the 2018 MTEF had resulted in an annual increase of 10.4 percent.

Mr Steve Kenyon, Director:Local Government Budget Process, also gave input by explaining the formula for allocation of equitable share funds to local government, and announced a new Integrated Urban Development Grant meant for intermediate urban areas (neither metros nor small towns), to be launched next financial year. He also outlined the changes made to the Public Transport Network Grant, the Municipal Demarcation Transition Grant and new funding for the Bucket Eradication Programme.

Due to time constraints, the parts of the presentation dealing with Treasury’s response to the Committee’s recommendations on the 2017 Division of Revenue Amendment Bill would be heard the Committee meeting following today.

Discussion

Responding to the issue of non-payment of electricity and water, Mr N Paulsen (EFF) took exception to a member of the delegation’s remarks as he expected a better tone and language when it came to dealing with poor people who had no money to pay for these basic amenities. He asked for an explanation as to how much revenue municipalities were making from selling services, such as electricity, and how much of that revenue was ploughed back into service delivery. What is considered the benchmark (‘good cost’) for what municipalities should charge residents for services? Were municipalities encouraged to start generating income for themselves and not depend on Treasury? These business ventures/investments could create more jobs and improve people’s lives.  

Ms Ngqaleni responded that if the matter was not addressed, not much could be achieved. It is a societal problem which even affects government itself. Further, non-payment is not always a matter of being poor but can be a question of people avoiding responsibility for paying for what they use. She suggested that the problem be regarded as a political matter and tackled as such. Her view of self-generation of income by municipalities was that this could not happen without getting the basics right such as having a well- maintained, sound infrastructure, a good zoning system, by-laws, ease of doing business, etc.

Mr A McLoughlin (DA) asked for clarification where mention is made of a pilot programme conducted “through a window in the MIG for two cities”. On the Bucket Eradication Programme, as part of the changes to local government grants, he wanted to know whether this meant the programme had now changed from being a national programme (under the Department of Water and Sanitation) to a local government one or not.  The Member noted the worrying tendency to pack local government with more responsibilities without the attendant funds. A related concern was that by asking municipalities to generate their own income and therefore pay their way, one might be putting them under pressure to accumulated crippling debt. How would municipalities pay this debt?

Ms Ngqaleni stated that the idea is to develop a separate urban development grant, but currently these places are still part of the broader Municipal Infrastructure Grant (MIG) and so the ‘window’ is about treating them differently within MIG itself.  

Mr Hattingh explained that municipalities, who have a healthy credit profile, are encouraged to borrow only for purposes of funding revenue-generating projects or assets, not for expenditure purposes or repayment of loans. He urged Committee Members who still required more detail on the presentation to get hold of the Treasury’s quarterly Section 71 publication from the National Treasury parliamentary office.

On the Bucket Eradication Program, Ms Fanoe replied that water and sanitation, just like schools, are a concurrent function meaning that these functions are shared between national  and local government spheres, and that there is flexibility of funding depending on where the best capacity lies.

The Chairperson expressed regret at the inadequacy of time to do justice to the issues on the table but  

urged Members to either send questions to National Treasury through available channels or save them for a meeting scheduled for the following day.

The meeting was adjourned.

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