2018 Division of Revenue Bill: National Treasury briefing, Financial Fiscal Commission & SALGA submission

Meeting report

Opening Remarks by Chairperson

The Chairperson said that the economic outlook had improved since 2017 and that there was now a clear level of optimism in the air that would hopefully boost business and lead to investments. Government had to strengthen the Audit Act (even more) so that the crackdown and fight against irregular, fruitless and wasteful expenditure were stopped  immediately - Committee members had to play their part.

He welcomed everyone to the meeting and asked National Treasury to start proceedings.

Briefing by National Treasury

Ms Malijeng Ngqaleni, DDG: Intergovernmental Relations, National Treasury, led the briefing. She was supported by other members from her team and from the Local Government budget unit in Treasury.

The DDG outlined the government process followed for the Division of Revenue Bill  - she said it was a consultative process and involved many stakeholders like the Budget Council (Finance Minister and Finance MEC’s), Cabinet, Intergovernmental Technical Committees, the Ministers Committee on the Budget and others - from its first tabling at the MTBPS (Medium Term Budget Policy Statement) in October 2017 to the Division of Revenue Bill being tabled in February 2018 on budget day. 

She said that the average annual increase was above inflation for all three spheres of government - national government allocation grew by 7.1%, the allocation to the provinces grew by 6.9% and that for local government by 7.5%. In addition to these allocations by National Government, municipalities and provinces also raised a substantial portion of their budget themselves. She did however caution that debt servicing costs (9.4% of the budget) was constraining the budget allocation process which meant as a whole there was less money available for government service delivery programmes. 

National Government allocation was reduced by about 2% from the 2017 MTBPS while the reduction for provincial governments were 1% and that for local governments amounted to 3.5%. This amounted to a reduction of around R85bn in total. The biggest impact of this reduction was in conditional grants (i.e. monies transferred for a specific purpose that may not be used for any other project). Some of these reductions would be felt in infrastructure projects like building of schools, human settlement grants and public transport. However the funding for some programmes were not reduced - these included amongst others - the National Schools Nutrition Programme, the free basic service fund to the qualifying 9.8m households and the comprehensive HIV, Aids and TB grant. 

Other key aspects of the Division of Revenue (DoR) was that it favoured rural areas as opposed to urban areas, eg. R10 500 per household for rural municipalities and only R4 700 for metros (because metros had a better capacity to raise some of their own revenues). The severe drought in various parts of South Africa (Western Cape, Northern Cape and Kwazulu Natal) meant that around R6bn was allocated to augment drought relief measures, in provinces and municipalities. Some of this money would also be used for related and approved infrastructure projects, e.g. those that ensured long-term sustainability of water supplies.  

A key imperative of the DoR was to improve the impact of transfers to municipalities. Some of these impacts were to provide more capacity support to municipalities (R2bn allocated), the free basic services to 9.8m households and infrastructure grants to fund service delivery for the poor (R41bn). NT was of the opinion that government needed to change what was happening in municipalities - a new way needed to be found to ensure that more of the benefit from National Government reached residents in each municipality. Underperforming municipalities had to be given assistance to ensure service delivery levels to their residents were improved. NT would be working with all stakeholders in 2018 to design the details of support programmes to enable this.

Some clauses in the DoR were amended to strengthen the Bill. These related to improve municipal borrowing - to allow better alignment with the MFMA (Municipal Finance Management Act) and to address a recommendation raised by the FFC that would allow credit-worthy municipalities to borrow private capital (in addition to the public funds from government). The other amendment was to address the problem of unfunded mandates where some municipalities conducted service delivery programmes without sufficient funding.

Ms Dumebi Ubogu, Director : Provincial Policy and Planning, National Treasury, gave an overview of the allocation to provinces. The total transfers to provinces was R571bn. The biggest allocations went to Kwazulu-Natal (21%) and Gauteng (20%). The Eastern Cape received 13%, Free State 6%, Limpopo 11%, Mpumalanga 8%, Northern Cape 3%, North West 7% and the Western Cape received 10%. She also mentioned that child support grant (Early Childhood Development grant) had increased from R380 to R405 (per month) for qualifying households.

Mr Steven Kenyon, Director:Local Government Budget, National Treasury, gave an overview of the transfers to local government. The direct transfers to municipalities was about R120bn. This excluded the allocations from provinces. Included in this grant were , amongst others, funding and measures to improve public transport (Public Transport Network Grant), a programme to eradicate the bucket system in informal areas and support to develop urban development beyond metropolitan municipalities -  into intermediate cities (i.e. secondary cities).

An official from National Treasury gave a brief overview of local government budgets and debt. According to NT unfunded municipal budgets remained a major stumbling block constraining efficient financial management, e.g. in 2017 only 125 municipalities tabled funded budgets while in 2018, 81 municipalities voted to adopt budgets they knew were not funded. Although a large proportion of municipal debt was owed to Eskom and the Water Department, what was often often overlooked was that the debt  (although much smaller) municipalities owed to SMME’s and the negative impact this had on the economic wellbeing of small and emerging businesses.

 Another critical issue was the debt that government departments owed various municipalities. To date, only  R1.6bn of the almost R4bn government owed to municipalities, have been paid. According to NT,  the Provincial Department of Public Works was the main culprit. Free State had the highest debt to municipalities (25%). Other provinces that owed more than 10% to municipalities were the Eastern Cape that owed 13%, KZN and NC that each owed 19% and the North West that owed 10%. The only Province that had no municipal debt was the Western Cape. 

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, gave a brief overview of the NT responses to recommendations for the DoR by the Committee and others state institutions like the FFC.

Some of the key recommendations by the Committee, that NT was in agreement with, were -  that an action plan had to be drafted to fill vacant senior management positions in municipalities, and a review of the reallocation policy (unused funds). NT said reallocation was only used as a last resort.

NT responded to some recommendations made by the FCC on the DoR, namely: 

• urban spatial development - FCC recommended that urban development grants be consolidated. NT committed to grant consolidation, but as a long term objective
• FFC recommended that there be incentive grants for city compaction - NT in agreement and advised that there were plans to enable this at local government level.
• FFC recommended that fuel levy be ring fenced for public transport use - NT responded that fuel levy was shared amongst various spheres of government and had replaced a former municipal own revenue source (RSC levies). Ring fencing fuel levy was therefore not possible.
• FFC recommended that the Financial Management Grant (FMG) be used to fund mSCOA implementation (Municipal Standard Chart of Accounts), PPP in cities (Public Private Partnerships) and developing land value capture capacity in cities. NT agreed on the importance of these issues - however it advised that the FMG was not an appropriate vehicle to fund issues such as these. The grant was small and already heavily subscribed for municipal capacity building. It felt cities should fund more of their own capacity building rather than rely on government grants.

Discussion

The Chairperson commented that government had to partner with local organisations (in the provinces and municipalities) to ensure better service delivery. He asked Committee members and provincial delegates for their comments on the NT briefing

A Committee member commented that the problem with municipal service delivery was political patronage - i.e. as one political regime gains control of a municipality it appoints its own affiliated members regardless of their experience and this lack of expertise often derails programmes. He also wanted more information on child grants. Another concern raised was the drought in the Mamusa municipality and the severe impact it had on citizens in the area. Some areas had no water and a plea was made to help in addressing this problem. A pipeline was needed to transport water to where communities could access it in their area.

Mr M. Chabangu (Free State, EFF) wanted to know if the Committee and attendees could help the Free State municipalities facing a shutdown of electricity from Eskom. It was municipalities that defaulted on payments but in the end it was people that suffered. He also requested that the extended public works programme (EPWP) had to benefit all, not just just those with the correct political affiliations within municipalities. 

The Chairperson responded that in his constituency everyone benefited from the EPWP.

Mr L Gaehler (Eastern Cape, UDM) wanted clarity on the debt owed to municipalities by provinces. This was an old problem and something had to be done to find a lasting solution. He also wanted to know if there was a special scarce skills grant for rural areas - especially for qualified teachers who were needed in rural areas.

A Committee member said the Municipal managers and CFO’s in municipalities with unfunded budgets had to be held accountable. It was totally unacceptable and irresponsible and that those guilty had to be dealt with severely. He wanted to know if the infrastructure grant was also applicable to smaller municipalities or if was it just for larger cities.

The Chairperson commented that the MFMA had to be adhered to and that those who did not, had to pay the price - Municipal Managers, mayors and CFO’s had to be held accountable. 

Mr O Terblanche (Western Cape, DA) said although he was encouraged by recent developments he was still very worried about the inability of the various spheres of government to co-operate effectively on the ground to deliver services to people. Hunger and extreme poverty still existed and the Committee had to help in any way to address this.

Ms T. Motara (Gauteng, ANC) said she was concerned about the responses to the disaster relief programme and wanted to know if the resources given to those provinces would be spent properly. She wanted to know who would oversee the process to ensure good governance. Some provinces and municipalities did not have a good record in ensuring funds and resources are spent where needed. She cited the performance of the Northern Cape as an example of poor management in this regard.

Mr F Essack (Mpumalanga, DA) said that overall there was a good story to tell as the impact of financial transfers to municipalities had increased but that he had a major concern with the lack of service delivery in some municipalities despite the financial contributions it had received. There seemed to be no political will to correct the problem and no one was held accountable despite several damning reports from the Auditor General (AG). He wanted to know how government was going to address this problem. 

The Chairperson responded that “we were in government” and had to take responsibility to fix things. Execution and oversight was via Parliament to bring things on even keel. All had to work together - Parliament and provincial governments. At the end of the day, he said, the finger would be pointing at “us” (the Committee as government’s representative on this matter). He said Committee members come from municipalities and had to hold them responsible. Municipalities had underspent vast amounts on service delivery programmes in 2107 and Committee members had to intervene to make a difference. 

An EFF member from the Free State legislature said he was concerned about the lack of capacity in municipalities. He was aware that some municipalities were using land grants for other purposes, which resulted in that programme failing. He wanted to know what the consequences were for this mismanagement.

Other comments from Committee members were that they needed more detail on the integrated transport grant and the public transport grant. More information was needed on why certain provinces (like the Free State) that was earmarked for NHI programmes had yet to receive the funds for this. Another concern that was raised was on the under expenditure on municipal grants and what the impacts and consequences of these were. 

Ms Ngqaleni, said that the problem with the effectiveness of the money available for the drought relief programmes was not the lack of money but rather the inadequate spending thereof. This was related to lack of capacity within municipalities and political instability in municipalities. A big factor related to Eskom’s threat of black outs in some municipalities was because of inadequate systems in municipalities to manage and control credit. She agreed that people should not suffer because of problems at municipalities - she cited an example in the Eastern Cape where the Education Department was defaulting on electricity payments. In that instance, power was cut at the Education offices rather than at schools. There was a culture of “not paying” in some areas and this had to change. She agreed that unfunded budgets should not be allowed in municipalities.

Ms Fanoe said that if members wanted more detailed information on municipal grants they could consult the DoR Bill document on page 203. There was a separate grant that supported rural infrastructure (it was not the same as the grant for municipal infrastructure) - it was called the Rural Road Asset Management Growth Fund and the detailed allocation per municipality was on pages 245-250 on the DoR Bill. A key deliverable was that the road and transport infrastructure had to support economic activity in municipalities. She advised that queries on NHI had to be referred to the National Health Department. Similarly, NT could not comment on water pipeline issues and that this had to be referred to the Department of Water and Sanitation.

Ms Ubogu said that there was no rural allowance or grant for teachers working in rural areas but that she believed that there was a policy in the Education Department that sought to address the issue.

Mr Kenyon said he forgot to mention that in terms of disaster relief - an amount of R21m had been allocated to address the sinkhole problems in the Merafong district. Disaster relief was only available to those municipalities with clear and concise plans and with the capacity to address the problem.

The Chairperson suggested that both FFC and SALGA brief the Committee and that members discuss their views afterwards. 

Briefing by the Financial and Fiscal Commission FFC

Prof Daniel Plaatjies, Chairperson, FFC, led the FFC briefing and was supported by other members from the Commission. He said that the 2018 budget was tabled under difficult circumstances but that government’s credibility had remained intact in crafting the new budget - core expenditure had been protected and it was expected that the deficit would decline in the medium term.

The FFC supported the technical and other changes in the Bill as these were aligned to recommendations made to NT by the Commission. Some of these changes were that NT no longer needed to approve or provide security for conditional municipal grants. Another change was that provincial transfers to municipalities would in future require an accompanying  service level agreement between the province and the municipality

Mr Eddie Rakabe, Programme Manager, FFC, briefed the Committee on the DoR fiscal framework between the three spheres of government. He said it was a very good balancing act by NT to achieve a total real annual average growth of 1.4% over the 2018/19 period. Some of the FFC concerns were that the cost of employment was increasingly crowding out the capital spending on goods and services and that some of the grants had to be linked to social development outcomes at provinces (e.g. for health and skills training). A major FFC concern was that the biggest casualty of the fiscal consolidation was that the money available for infrastructure development had been reduced - an example was in education where a reduction of around R3.6bn on the Education Infrastructure Grant was in place. According to the FFC it did not seem as if the reduction in grants were done in structured manner. FFC therefore proposed that in future a more rigorous analysis of each grant was done before cuts were done. 

Prof Plaatjies concluded the briefing by saying that the FFC supported the new conditional grants subject to the matters raised in its submission. The funding for higher education had to accompanied by measures to improve quality and throughput. There was also a need to review the vertical division of the revenue to ensure alignment with the responsibilities in each sphere of government.

Briefing by SALGA

Mr Simphiwe Dzengwa, Executive Director: Municipal Finances, SALGA, was the main speaker on SALGA issues related to the DoR, but was supported at times by other members of the SALGA delegation. He said he would brief the Committee on the main issues that were of concern to SALGA regarding the DoR.

A recurring theme of the SALGA briefing was that the share of revenue for municipalities from government was inadequate. The allocation by NT was not fair and municipalities were not satisfied with the treatment insofar as the approving of financial support from government as a whole (national and provincial). SALGA appreciated the support from the FFC.

Although SALGA participated in the budgetary process it was not happy with the outcome of some aspects of the budget, particularly the overall share of 9% of the budget. The funds received did not cover the level of services municipalities had to provide. More money was spent to service debt levels (in government) than to fund municipalities.

NT dealt with municipalities unevenly as opposed to other government departments - e.g. Eskom could cut power supply to municipalities but government departments did not suffer the same fate. This was due to political pressure.

SALGA agreed that unfunded budgets had to be disallowed.

SALGA mentioned examples of mismanagement in the Free State municipalities where more money was spent on employee costs than on service delivery. Some municipalities had not received its funding allocations from NT. The system used by NT (MScore) to evaluate municipal performance was difficult to implement and not fully understood. In addition the MScore cost of compliance for municipalities was unrealistic. 

Although SALGA was unhappy with the local government budget it was not “fighting” with NT, it merely had a difference of opinion with NT and wanted to work with the latter to improve things.

Discussion

The Chairperson wanted to know how often SALGA met with NT, as some of the issues raised by SALGA could be addressed in these meetings. He was concerned that some municipalities did not receive their allocations as this would severely constrain their operations. The issue had to be resolved by the next Committee meeting (April 2018). The “Back to Basics” approach adopted by Parliament was crucial to addressing the challenges outlined in these briefings. He said that “we” (i.e. all spheres of government) had to ensure that we improve service delivery drastically - as an example - he said the Northern Cape had nine municipalities in “ICU” and that one, Renosterberg, was beyond help. Government (i.e. “we”) had to take the difficult decisions to improve the situation currently prevailing on the ground in some areas.   

Mr Chabangu wanted some clarity from SALGA on an issue in a Free State municipality where he was aware that a Municipal Manager was not able to retire because his retirement fund monies could not be located. He wanted to know how this was possible.

Mr L Nzimande (KZN, ANC) said he was concerned about the tone of the FFC presentation - he wanted to know if they were executing their mandate properly as their  “voice” was very similar to that of SALGA. He wanted to know if the budget approved favoured rural municipalities vs. urban municipalities as recommended by the FFC. He was concerned about the lamenting tone of SALGA, as it seemed all it did was complain about the lack of adequate resources and funding - he wanted to know what the crux of the matter of their concerns were.  He asked what reforms and plans SALGA had in place to help with lack of capacity at some municipalities and to improve the effectiveness of systems. The lack of capacity was a real concern in municipalities. It was no use complaining about the “MScore” system if one did not know what the real concerns were about it. A lot of the issues and concerns raised today related to policy matters and what choice of policies government chose to implement. 

A member from the Free State legislature said that all SALGA was doing was to lament on the reduction in the Municipal Infrastructure Grant. Municipalities were paying levies to SALGA and she wanted to know if these were producing the results envisaged - do municipalities prioritise service delivery or payments to SALGA? She wanted to know what SALGA’s role was in improving capacity at municipalities. There was an abject failure in (some) municipalities - there was no capacity, no prioritised budgeting etc. SALGA should not play the “blame game” but had to come on board and find solutions. 

The Chairperson commented that it seemed to him that SALGA and the Free State Legislature needed a lot more engagement to address issues as raised above.

Mr Dzengwa said that the FFC could use SALGA’s allocated time for responses, however the Chairperson said that this would not be allowed as members want to hear what SALGA’s views were on some of the responses. There would be no passing of the buck.

Prof Plaatjies said that the FFC was a constitutional structure and it would comment on the issues as they pertain to the FFC and that SALGA should speak for themselves. The FFC still had some matters where it differed with government (i.e. NT) as some policy implementation programmes had not yielded the results as envisaged. The FFC participated in the DoR debate but maintained its independence and would flag aspects where it disagreed or felt not enough was being done .

A member from the FFC team made some comments on the urban vs. rural debate, indicating that rural municipalities received around 200% more of the share of municipal allocations than urban municipalities -  as the latter had a greater capacity to raise additional funds. He added that the the FFC was doing more work on this issue and would inform the Committee on the outcomes, once this was completed. 

A delegate from SALGA advised that it would investigate the matter of the Free State municipality (missing retirement fund monies) and would report back to the Committee. SALGA had no intention of blaming other government departments, it was merely fulfilling its mandate of lobbying on behalf of municipalities where required.  

Mr Dzengwa continued with the SALGA response.

He said SALGA was not at odds with other government departments - it merely had different nuances on the way forward. SALGA did collaborate on the Bill and provided input. SALGA had provided assistance to municipalities to improve budgeting. SALGA did not have a problem with “MScore” but some municipalities had experienced challenges in implementing it. SALGA was a membership organisation - members (i.e. municipalities) only paid if they felt there were benefits. SALGA could not sanction or take action against its members - it could only advise and provide guidance to improve matters.

Ms Ngqaleni, said that the DoR aimed to give an equitable share of revenue to the state, including municipalities. She admitted that there were technical problems relating to allocations but that once notified, NT had addressed the problems and all allocations had since been paid.

She said that the thorny issues on municipal debt could be managed by municipalities - she cited one municipality in KZN that had gone on a campaign to inform its citizens - to pay for its services -  that yielded positive results. She felt this campaign should be rolled out nationally in other municipalities.

The Chairperson commented that this was a very good example of decisive leadership in a municipality with a clear action plan to gets things done. More of the was needed.

He said the Committee would embark on a thorough engagement with provinces next week(s) to ensure that the DoR is put to bed and enable the delivery of service for the citizens of our country.

The meeting was adjourned.