Division of Revenue Bill & Public Audit Excess Fee Bill: briefing

Standing Committee on Appropriations

07 March 2019
Chairperson: Ms Y Phosa (ANC); Mr C de Beer (ANC, Northern Cape)
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Meeting Summary

Both the Standing and Select Committees on Appropriations were briefed by the National Treasury on the how the nationally collected tax revenue will be shared between the three spheres of government.

Main Budget expenditure will grow by 8% over the medium term. National departments will receive R684.7 billion this year; provinces R612.3 billion and local government R127.3 billion. There had been some budget cuts aimed at containing South Africa's debt but important public spending programmes had been protected.

Conditional grants would be used to involve the private sector in addressing public sector challenges. One grant would encourage private investment in projects to reduce electricity consumption by government departments by retrofitting more efficient technology.  Another would subsidise Land Bank loans to emerging commercial farmers so they could enter the loan market at a cheaper rate and expand production. A housing subsidy grant would help people obtain loans for affordable housing.

Treasury highlighted changes in the way grants were paid in order to better address health, education and housing issues.

Funds were set aside to hire more doctors and nurses; the Sanitary Dignity Campaign would be rolled out at schools; and more funds would go to eradicate inappropriate toilet facilities at schools.

The SA National Roads Agency would receive funding for upgrading the Moloto Road linking Gauteng, Mpumalanga and Limpopo and for building the Wild Coast Highway.

Funds were allocated for an academic hospital in Limpopo and for expanding Cape Town’s MyCiti bus network.

Committee members asked what was being done about the crisis in local government and the non-payment of service fees. There was a criticism that the Equitable Share Formula for dividing tax revenue between the national and provincial governments was unfair.

Treasury noted that the local government challenge was being dealt with by Cabinet and several measures were being considered.

Meeting report

The National Treasury delegation included Ms Malijeng Ngqaleni, Deputy Director General for Inter-Governmental Relations; Ms Wendy Fanoe, Chief Director for Policy and Planning; Mr Letsepa Pakkies, Senior Economist; Mr Steven Kenyon, Director for Local Government and Budget; Adv Empie van Schoor, Chief Director for Legislation.

Ms Malijeng Ngqaleni, Deputy Director General: Intergovernmental Relations, said national and provincial governments receive the major share of the national revenue. The local government share was smallest because municipalities were able to raise their own revenue.

Over the Medium Term government would spend 62% more on debt service costs than on transfers to local government. Government was committed to reducing the need to borrow funds.

Figures provided show that Main Budget expenditure will grow by 8% over the medium term. National departments will receive R684.7 billion this year. The provinces receive R612.3 billion and local government R127.3 billion. There were some cuts in the budget aimed at containing debt, but important public spending programmes had been protected.

The biggest reduction in provincial funding was a R3 billion cut in the Human Settlements Development Grant, which had a history of poor performance. The cuts were smaller than last year and there had been a huge effort to protect provincial and local government spending while trying to stabilise SA's debt.

While the tax base was concentrated in urban areas the division of revenue favoured rural areas. Allocations of R11 200 per household to rural municipalities were twice as much as metros which were better able to raise their own revenue.

Ms Ngqaleni said government was looking at using conditional grant funds to encourage private sector involvement in dealing with public sector challenges.

One example was the redesign of the Energy Efficiency Demand Side Grant. This grant would encourage private investment in projects to reduce electricity consumption by government departments by retrofitting more efficient technology.

Funding from the Comprehensive Agricultural Support Programme Grant had been re-prioritised to subsidise Land Bank loans to emerging commercial farmers so that they can enter the loan market at a cheaper rate and expand production.

A Budget Facility for Infrastructure had been created to improve infrastructure planning and delivery. Funds for two projects had been allocated through conditional grants:
• Limpopo Academic Hospital. This project would improve tertiary healthcare in the region and increase training capacity in the country. R1.4 billion would be added to the National Health Insurance Indirect Grant over the 2019 Medium Term Expenditure Framework (MTEF).
• The MyCiti project in Cape Town aimed at improving public transport in under-served areas. R2.8 billion would be added to the Public Transport Network Grant over the MTEF.

Ms Ngqaleni said the Bill contained measures to improve mobility on the country’s roads. These were a response to matters raised at last year’s hearings on the Division of Revenue Bill.

Road maintenance was in crisis in many areas, despite large budget allocations. Over the MTEF the National Roads Agency, SANRAL, would be allocated R42.9 billion; the Provincial Road Maintenance Grant would receive R36.5 billion; R7.9 billion was for municipal roads as part of the Municipal Infrastructure Grant.

Provinces and municipalities would be supported in developing better road management systems. Government was prioritising investment where the system was already working. SANRAL would receive:
• R3.5 billion in the next two years for upgrading and maintenance of non-toll roads.
• R3.3 billion over three years for upgrading Moloto Road connecting Gauteng, Mpumalanga and Limpopo.
• R3.2 billion over three years for building the N2 Wild Coast Highway.

Ms Ngqaleni said the Human Settlements Grant had been reduced. Instead, funds were being shifted from government-subsidised units to broader housing market interventions. Government alone could not deliver housing at the required scale. There were two initiatives:
• A finance linked individual subsidy programme to support home-buyers in the affordable housing sector.
The administration of the subsidy would be shifted from provincial governments to the National Housing Finance Corporation to make the subsidy easily accessible through banks and to standardise the rules.
• Funds for upgrading informal settlements were set aside for this in the human settlements grants paid to provinces and municipalities. There should be community participation in the upgrades.

A Title Deeds Restoration Grant of R1.1 billion would be used to eradicate the backlog in supplying housing  title deeds to people by provinces and other entities.

School children needed decent conditions in order to be able to learn. There were three initiatives:
• R157 million would be allocated to provinces to expand the provision of sanitary pads to disadvantaged learners under the Sanitary Dignity Project.
• An extra R2.8 billion over three years would be used to eradicate unsafe and inappropriate sanitation facilities in schools.
• Kwazulu-Natal and Western Cape would be allocated R200 million to repair school infrastructure damaged in natural disasters.

A Human Resource Capacitation Grant of R2.8 billion over three years would be paid directly to provinces to enable them to employ more doctors and nurses. Extra funds would also be allocated to fighting TB and malaria and for improving salaries of community health workers.

Urban infrastructure grants were being integrated to provide greater flexibility in planning.

Grants were designed to provide incentives to municipalities to improve their performance.

Ms Ngqaleni said many municipalities were in financial crisis. The Constitution required the provincial and national governments to help municipalities to manage their own affairs. However, despite spending R2.5 billion a year on capacity support, there was no sustained improvement in performance. The system of support would be reviewed this year.

Treasury Chief Director for Policy and Planning, Ms Wendy Fanoe, drew attention to a policy change in the Bill. Conditional grants to municipalities were often spread across several national departments, creating an administrative burden and resulting in inefficient spending. New clauses in the Bill were aimed at ensuring better coordination of grants.

Ms Fanoe said that the Provincial Equitable Share formula was under review. This was being done gradually rather than adopting a ‘big bang’ approach which could result in major shocks to the system of sharing the national revenue.

Currently, major changes were being phased in to improve data on school enrolment and the size of the school-age population. The number of scholars had been overestimated in some provinces. Education accounted for nearly half the provincial equitable share.

Mr Steven Kenyon, Treasury Director: Local Government and Budget, spoke about Treasury’s response to recommendations made by the Committee after last year’s hearings on the 2018 Division of Revenue Bill.

Treasury fully agreed with the Committees on the need to implement a Municipal Standard Chart of Accounts. This was a key reform. Treasury provided advisers to help provincial treasuries at municipalities and provided guidance on budgeting, reporting and preparing for audits.

In response to the Finance and Fiscal Commission (FFC) recommendations, Treasury agreed on the need to strengthen control measures and take decisive action as soon as ineffective use of funds was detected.

The FFC recommended that municipalities be given greater flexibility in the use of grants to encourage innovative approaches to local problems. Mr Kenyon said government agreed with the principle of promoting local solutions where municipalities had the capacity.

Discussion
Several committee members wanted to know how the individual housing subsidy programme would now operate and asked why its administration had been shifted from provincial government.

A committee member from the Free State said the provincial government had no problem in detecting problems in municipalities and calling in the National Treasury. However, what was lacking was efficient support from the Department of Cooperative Governance (COGTA).

Another member asked what the plans were to ensure that municipal crises were not repeated year after year at the same municipalities. He asked what was being done to ensure that municipalities were serious about collecting payment for services.

One member asked what future there was for cash-strapped local and district municipal councils.

Another asked what was being done to ensure that the Sanitary Dignity Project reached those it was intended to help.

An Free State NCOP member who was sitting in on the discussion expressed anger about the way in which the Equitable Share Formula was implemented, saying it was time to have a hard look the fairness of the revenue sharing formula. Every year the Committee heard that it was being reviewed but nothing was happening. Money taken from the Free State budget was being used to finance the Moloto Road and asked whether it would be spent effectively.

Mr C de Beer (ANC), Select Committee Chairperson, proposed that in the next Parliament, the two Appropriations Committees should meet every quarter to do a monitoring exercise on local government.

Ms Ngqaleni replied that the location of the housing subsidy programme in provincial budgets had meant its implementation was fragmented. This subsidy was for individuals who were going to the banks for mortgages and was demand-led. It was necessary to have norms and standards on how the banks interfaced with the grant, hence the decision to centralise it in the National Housing Finance Corporation. The provinces could, however, play a role in encouraging people to apply for it.

On local government, Ms Ngqaleni replied that  a policy on district municipality councils was being considered by COGTA. She said there was a clear plan on how to respond to the crisis in local government and the non-payment of service charges. A package of measures had been put to Cabinet. These included enforcing funded budgets, pre-paid electricity meters and the restructuring of municipal debt. The culture of non-payment was a political issue which had to be resolved at that level.

For the Sanitary Dignity Project, the Department of Women had a clear plan to roll it out first at the poorest schools.

On the review of the equitable share formula, Ms Fanoe replied reforms had been implemented over the past two years. To implement them all at once would cause major disruption.

On the Moloto Road, Mr Kenyon replied that while funds had been taken from provinces in the past, the R3.3 billion allocated this year was new money which would be used for upgrading a notoriously dangerous road.

Public Audit Excess Fee Bill
Treasury Chief Director: Legislation, Adv Empie van Schoor, explained that the Bill was intended to address problems the Auditor-General had in collecting audit fees from some government entities by making these a direct charge against the National Revenue Fund instead of the excess being paid by National Treasury.

Currently the law provided that where audit fees exceeded 1% of the current and capital expenditure of the entity being audited, National Treasury would pay the excess if it believed that the organisation was financially distressed. This did not apply to national and provincial government departments which had to pay the full fees themselves.

The problem was that it was difficult to predict what these claims would be and budget properly for them There was always a shortfall between the amounts due and the funds appropriated for this in the Treasury budget.

The Bill therefore provided for excess audit fees to be a direct charge against the National Revenue Fund.

Adv van Schoor said the changes were necessary to ensure the viability of the Auditor-General.

Possible abuse by qualifying auditees would be curtailed by a provision that the Treasury would still determine whether an auditee was unable to pay.

The Chairperson urged Members to study the analysis of spending by provinces and municipalities in the Treasury Budget Review and use it as a monitoring tool for oversight in their constituencies.

Meeting adjourned.

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