2018 MTBPS: SALGA input

NCOP Appropriations

09 November 2018
Chairperson: Mr C De Beer (ANC; Northern Cape)
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Meeting Summary

Documents handed out: SALGA presentation [awaited]; 2018 Medium Term Budget Policy Statement (MTBPS) ; MTPBS Speech & Money Bills

The Committee received a briefing from the South Africa Local Government Association (SALGA) on the 2018 Medium-Term Budget Policy Statement (MTBPS).

SALGA noted that over the medium term, government proposed to allocate 48.1 per cent of available non-interest expenditure to national departments, 42.9 % to provinces and 9  % to local governments. R415.5 billion will be transferred to local government, including R146.3 billion in infrastructure conditional grants. The largest transfer to municipalities was the local government equitable share, which would grow 9.9% in 2019/20, 9.7% in 2020/21 and 8.6% in 2021/22. These above-inflation increases account for growth in household numbers and higher bulk water and electricity costs. The government will strengthen municipal capacity to improve the use of these allocations. However, it was quite evident from the above figures that local government, at the cold face of service delivery receives an inadequate distribution of nationally raised revenue. Considering the fiscal, revenue, corruption and expenditure crises facing the nation, the MTBP statement was fairly expected. The reality was that SA is in an economic crisis and this current crisis can only be understood by looking at the root causes in a holistic way. The solution to the country’s economic problems lies in bold measures of transformation. Ratings agencies will likely look out for three priority areas that could trigger changes to the country’s sovereign credit rating in the months after the MTBPS. These are 1) the pace of fiscal consolidation, 2) reforms in state-owned enterprises (SOEs) and 3) measures to lift economic growth- On the first point, the message is quite clear: the trajectory of the fiscal balance is not narrowing as previously expected. The peak in public debt (a percentage of GDP) is also being pushed out further. The deterioration in deficit and debt numbers has been seen frequently over the past five years, and rating agencies will have to ask the question as to how this may influence South Africa’s credit worthiness going forward. Regarding reforms to SOEs, there is certainly some positive momentum of late under Minister of Public Enterprises Pravin Gordhan. This includes increased profitability of international routes services by South African Airways (SAA), work on turnaround plans for SAA and South African Express, and the appointment of new boards at several troubled public enterprises. Economic growth remains a thorny issue. Forecasts for growth in the MTBPS are underpinned by the success of the economic recovery and stimulus plan. Rating agencies will need to make their own projections based on their perspective on the extent to which the stimulus plan will be successful. Based on these three factors, rating agencies will probably not be too enthusiastic about the MTBPS. However it is worth noting that they are likely to pronounce only after assessing actions taken. The critical role that local government has to play in terms of the growth and improvement outlined by the President needs to be emphasized. Any investments or expansions have to be backed up with municipal services that are consistent, reliable and efficiently provided.

Members expressed concern about the absence of political leadership representing SALGA. They suggested that SALGA appear again before Committee at a later date. It was agreed SALGA should appear again to give responses to Members’ questions the following Friday. They noted that SALGA believed National Treasury was not providing adequate assistance to district municipalities to ensure their sustainability. However, municipalities were continually regressing in terms of audit outcomes. The majority of these municipalities were failing to deliver services and in luring investments in communities. These issues should be looked into by SALGA. How could SALGA argue that municipalities were not receiving enough grants when, in actual fact, money was not being utilised prudently. They wanted to know SALGA’s stand on district municipalities. Would SALGA support the shutting down of district municipalities or would they rather just toe the line politically? Why was it that municipalities were continually passing unfunded budgets with no consideration for the Municipal Finance Management Act prescripts? Some Members were demoralised by receiving the very same inputs year-in-year-out from SALGA.

Meeting report

The Chairperson welcomed everyone and indicated the Committee had received an apology from the political heads at SALGA. The letter said they could not attend due to an ‘unforeseen emergency’. He expressed his disappointment at the absence of the political leadership. The Committee was also meant to hold a public hearing on the 2018 Division of Revenue Amendment Bill but no submissions had been received.

Mr O Terblanche (DA; Western Cape) expressed concern about the absence of political heads from SALGA as well as Members who were failing to honour their commitments. It could not be that Members from the opposition constitute the majority during a meeting.

SALGA presentation
Mr Mohammed Lorgat, National Programme Director: Municipal Audit Support, SALGA, took the Committee through a presentation on SALGA’s responses to the Medium-Term Budget Policy Statement (MTBPS). Over the medium term, government proposed to allocate 48.1% of available non-interest expenditure to national departments, 42.9 % to provinces and 9 % to local governments. R415.5 billion will be transferred to local government, including R146.3 billion in infrastructure conditional grants. The largest transfer to municipalities was the local government equitable share, which would grow 9.9% in 2019/20, 9.7% in 2020/21, and 8.6% in 2021/22. These above-inflation increases account for growth in household numbers and higher bulk water and electricity costs. The government will strengthen municipal capacity to improve the use of these allocations. However, it was quite evident from the above figures that local government, at the cold face of service delivery receives an inadequate distribution of nationally raised revenue.

The Local Government Fiscal Framework is premised on the understanding that there are economic inequalities across the country. Certain municipalities have less own revenue raising potential than others. The supposed purpose of the local government equitable share is therefore to be redistributive and to fill the fiscal gap, enabling the local government sphere “to provide basic services and perform the functions allocated to it” in terms of S 227 (1) (a) of the Constitution, taking into account “the fiscal capacity” and “developmental and other needs” of municipalities. SALGA has identified a number of factors which suggest that the local government equitable share determination should be revisited. These include:

It has been stated that the “true equitable share” after adjusting for revenue raised by local government is 28%. In contrast, 2016/17 MTEF figures suggest that the figure, after adjusting for local revenue, is somewhere between 19.5% and 22%, depending on the measure of revenue that is used.

For many municipalities, the revenue-raising assumptions contained in the White Paper – and which form the foundation of the current local government funding model, including the determination of the equitable share – are neither accurate nor attainable, given local demographics and realities.

In addition, the role of the bulk suppliers in undermining municipal revenue collection needs to be considered and addressed. A more realistic model of municipal revenue needs to be developed, and the structural impediments that prevent municipalities from collecting revenue need to be addressed.

In a nutshell, considering the fiscal, revenue, corruption and expenditure crises facing the nation, the MTBPS was fairly expected. The reality was that SA is in an economic crisis and this current crisis can only be understood by looking at the root causes in a holistic way. The solution to the country’s economic problems lies in bold measures of transformation. Ratings agencies will likely look out for three priority areas that could trigger changes to the country’s sovereign credit rating in the months after the MTBPS. These are 1) the pace of fiscal consolidation, 2) reforms in state-owned enterprises (SOEs) and 3) measures to lift economic growth- On the first point, the message is quite clear: the trajectory of the fiscal balance is not narrowing as previously expected. The peak in public debt (a percentage of GDP) is also being pushed out further. The deterioration in deficit and debt numbers has been seen frequently over the past five years, and rating agencies will have to ask the question as to how this may influence South Africa’s credit worthiness going forward. Regarding reforms to SOEs, there is certainly some positive momentum of late under Minister of Public Enterprises Pravin Gordhan. This includes increased profitability of international routes services by South African Airways (SAA), work on turnaround plans for SAA and South African Express, and the appointment of new boards at several troubled public enterprises. Economic growth remains a thorny issue. Forecasts for growth in the MTBPS are underpinned by the success of the economic recovery and stimulus plan. Rating agencies will need to make their own projections based on their perspective on the extent to which the stimulus plan will be successful. Based on these three factors, rating agencies will probably not be too enthusiastic about the MTBPS. However it is worth noting that they are likely to pronounce only after assessing actions taken. The critical role that local government has to play in terms of the growth and improvement outlined by the President needs to be emphasized. Any investments or expansions have to be backed up with municipal services that are consistent, reliable and efficiently provided.

Discussion
The Chairperson appreciated the presentation by Mr Lorgat but indicated that Members would have wanted to pose questions to SALGA’s political figureheads rather than its administrators.

An ANC Member noted that SALGA believed National Treasury was not providing adequate assistance to district municipalities to ensure their sustainability. However, municipalities were continually regressing in terms of audit outcomes. The majority of these municipalities were failing to deliver services and in luring investments in communities. These issues should be looked into by SALGA. How could SALGA argue that municipalities were not receiving enough grants when, in actual fact, money was not being utilised prudently. For instance, in her home municipality infrastructural grants were returned to Treasury at the end of 2016/17 financial year without being utilised judiciously.

An ANC Member from the Free State Provincial Legislature said misdiagnosed problems and challenges within municipalities happening in the presence of SALGA were concerning. He was critical of the role of SALGA particularly in Free State municipalities. Nobody was speaking on behalf of municipalities at the highest levels of government. There appears to be no organised local government structures and this was a serious concern for legislators as they carry out their oversight mandate.

Mr F Essack (DA; Mpumalanga) said he would not have attended the meeting had he known that the Committee was to receive a briefing from an administrator instead of political figureheads from SALGA. Members needed to engage with politicians in local government instead of an administrator. Politicians must be held to account. He wanted to know SALGA’s stand on district municipalities. Would SALGA support the shutting down of district municipalities or would they rather just toe the line politically? Why was it that municipalities were continually passing unfunded budgets with no consideration for the Municipal Finance Management Act prescripts? He was demoralised by receiving the very same inputs year-in-year-out from SALGA.

Mr M Monakedi (ANC; Limpopo) also expressed concern about the absence of political leadership representing SALGA. He suggested that SALGA appear again before Committee at a later date. Having municipalities passing unfunded budgets had to be avoided at all costs and SALGA should take this matter very seriously. There were clear indications that councillors were not fully exercising their oversight and accountability mandates, and SALGA should ensure this is done. SALGA should pay attention to effective revenue collection to ensure municipalities have adequate infrastructural maintenance capacity. If there is no will on the part of political leadership, then addressing challenges in municipalities would be an insurmountable task. 

Mr Terblanche said the Committee had wasted its time meeting SALGA. The failure of SALGA’s political leadership to turn up was an insult. As it stood, local government poses the biggest threat to economic growth. Local government is collapsing and SALGA needed to do something. They should let the Committee know about turnaround strategies to be implemented. Every year the very same questions were being asked and nothing was happening. He added that additional funds could not be thrown into municipalities as they were failing to manage the funds and projects in a responsible fashion. 

The Chairperson said Mr Lorgat, as an administrator, would not be in a position to respond to Members’ questions. The SALGA political leadership should appear before the Committee next Friday to give responses. There must be consequences for breaking the law and non-compliance. Councillors must be taught to hold municipalities to account. SALGA must ensure that the budget forum was used effectively. A way forward must be devised and municipal structures needed to be functional.

The meeting was adjourned.




 

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