Division of Revenue Bill: Treasury briefing; Committee Report on Division of Revenue Bill Negotiating Mandate

Budget (WCPP)

15 March 2019
Chairperson: Mr D Joseph (DA)
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Meeting Summary

The National Treasury briefed the Budget Committee on the Division of Revenue Bill. The Bill had been tabled by the Minister of Finance on 29 February 2019, and it had now been referred to the provincial legislature for consideration. 

The worry among Members of the Committee was that the National Treasury might have been using 2011 census data, and therefore there was a possibility that the allocations did not consider the growing number of migrants to the Western Cape. Members asked for clarity on the factors that the National Treasury considered when allocating revenue to the provinces.

The presentation gave the Committee the sense that that the government was going to prioritise debt servicing rather than delivering services to the people. Members found this to be quite disturbing, given the fact there was an increase in the demand for services.

They were interested in gaining clarity on the accuracy of data on roads, the roll-out of the Sanitary Dignity project, the additional allocation over the medium term expenditure framework (MTEF) for school infrastructure, and the progress on the National Health Insurance (NHI) project.

The Committee did not support the bill. This because it was clear that more money would be spent on debt servicing and not on transfers to the local government, and that the Western Cape government was receiving less money, despite the increase in the demand for services.

Meeting report

Division of Revenue Bill

Introductory Remarks by National Council of Provinces (NCOP)

Dr Dion George (DA), Western Cape Member of the NCOP, said that the Minister of Finance had tabled the Division of Revenue Bill in Parliament on 20 February 2019, which had now been referred to the provincial legislature for consideration. The bill addressed the following matters:

  • Changes in the equitable division of nationally raised revenues among the spheres of government;
  • Adjustment to provincial allocations;
  • Adjustments -- technical corrections -- to local government allocations and changes to the gazetted framework.

National Treasury on Division of Revenue Bill

Mr Steven Kenyon, Director: Local Government Budget, National Treasury (NT), and Mr Marumo Maake, Director: Provincial Budget, NT, briefed the Committee of the Division of Revenue Bill.

The national and provincial government received the largest shares of the budget because of their functions. Local government received the smallest share because it had significant own revenue-raising power.

Over the medium term, government would spend 62% more on debt service costs than transfers to local government. Government was committed to moving towards a primary balance, reducing the need to borrow funds and incur interest costs.

The average annual growth was above inflation for all three spheres of government over the 2019 medium term expenditure framework (MTEF).

To manage the growth of government debt while funding priorities -- including Eskom -- some transfers had been reduced. However, important public spending programmes had been protected from major reductions. The bulk of the reduction in the provincial transfers (R3 billion) had come from the Human Settlements Development Grant (HSDG), which had a history of poor performance.

The reduction of R132.8 million from the provincial equitable share was offset by a salary freeze for provincial political office bearers. 

Discussion

Mr M Wiley (DA) commented that, according the presentation, the NT was working with the 2011 census figures. However, the Western Cape and Gauteng were the provinces that were experiencing extraordinary growth in population through migration. It was not reflected in the figures. How had that been catered for in the Division of Revenue over the years?

Mr R Mackenzie (DA) wanted clarity on the transfers to the provinces. The Eastern Cape had R80 billion and the Western Cape had R64 billion. There was a big discrepancy.  He asked for an explanation on how the allocation was determined. When looking at road transport, for example, was it based on the conditions of the current infrastructure? 

He asked if, with respect to learner numbers, NT took into account factors such as road infrastructure, rail infrastructure, teacher salaries, feeding schemes and street lighting, etc, to assist in the allocation. It was known that there was a process being busy worked on. How far was the process? How would it benefit the Western Cape, going forward?

According to the presentation, over the medium-term, the government would spend 62% more on debt service costs than transfers to local government. He asked NT to share those figures with the Committee to provide an understanding as to what the government was actually spending on debt service costs versus what the spending was on delivering services to the people.

Mr Mackenzie said that ESKOM kept getting money each year. Who from National Treasury was going to work with ESKOM to manage the R23 billion they were getting every year? They were getting R69 billion over the MTEF. Who was going to make sure that the R69 billion was well spent?

Mr T Simmers (DA) said that the presentation referred to improved use of the Road Asset Management Systems (RAMS). How accurate was the data?  How effectively had this been done in the Western Cape by the district municipalities, given that some districts had limited capacity and some had the capacity to do what was expected of the RAMS.

In the northern provinces, there was a systematic failure in governance. Some of these municipalities used to be defined as well-off, based on the income streams, etc. Did the NT look at them as poor municipalities now? Ultimately, the NT had to shift funds around to assist these municipalities, but what had the real impact been on the rest of the functioning municipalities?

Mr Mackenzie pointed out that, according to the presentation, the Department of Energy had submitted incorrect allocations to National Treasury, and the corrected allocations would be gazetted. He asked if it had been done and if NT had a copy of the gazette for the Committee.

He said R157 million had been added to the provincial equitable share for the roll-out of the Sanitary Dignity project. He asked for more details of the roll-out.

He commented that an additional R2.8 billion had been allocated over the MTEF for school infrastructure grants, and asked if it was specifically aimed at pit toilets or if it was for general upgrades. Would provinces without pit toilets get a portion of it?

Mr Simmers referred to the Finance Linked Individual Subsidy Programme (FLISP), and said that the administration and funding of the subsidies was being shifted to the National Housing Finance Corporation. What percentage of the total budget would go to administration?

The Chairperson asked for an explanation of the government's plan to get the rail system in the country functional again.

He observed that the Western Cape was not listed among the recipients of the HIV, TB, malaria and community outreach grant. He asked why that was the case, given that the province had a long history of TB.

He said that issues of policy were also about policy certainty, not just consistency. A policy may be consistent, but it may not necessarily be the correct one. He asked for the NT's view on that.

NT’s response

Mr Kenyon responded with regard to the data on school learners, and said that there were two halves to the education component. One was based on the number of learners that were in schools in terms of the school registration system. There was a new system that tracked individual learners through the school systems.  It was a much more sophisticated and accurate system. For the other data, NT had always used the most recent census for the number of school-aged learners in each province. This year, it had changed to using the 2018 median population estimates, which were the most recent estimates for the number of learners between the ages of five and 17.

The data that NT used for the education component was the most recent data available on how many learners were actually in each province. It reflected which provinces had faster growth in their learner numbers. The Western Cape growth was faster than the rest of the country, which was reflected in  the demand for services, so the provincial equitable share allocation grew faster for the Western Cape than for other provinces.

Mr Wiley wondered why the change in the budget growth was never seen to cater for the movement of students from province to province. It had a big impact on the province's resources, hospital queues, etc. Twenty thousand children were equivalent to 15 schools, but the province had a budget for only 12 schools. He asked if the NT tracked the students from province to province.

Mr Maake responded that the equitable share formula had six components. There could be movement within the education component and the adjustments could happen accordingly. However, the province made the final decision. The movement in the education component might be offset by the movement in the health component. Even if NT added money in the education component as a result of the changes in the data updates between provinces, it may not necessarily translate into more money in education. That decision had to be taken by the province itself. The National Treasury could not dictate to the Provincial Treasury (PT) and the Provincial Executive Committee to move that money to education.

Mr Kenyon said, with regard to the migration of people, that Statistics South Africa (StatsSA) was a sophisticated statistical agency that South Africans should be proud of. They did a lot of work on migration. They consider migration across international boundaries, across provincial boundaries, and they were now trying to expand to inter-municipal migration. The planners were therefore capable of knowing the level of migration associated with a province. 

He said that the provincial equitable share, as a whole, grew at 7.2%. If the provincial equitable share, as a whole, was growing at 9%, everyone would feel a lot more comfortable. Other provinces with lower growth would not have to be making tough choices around the closure of schools, restructuring teachers, etc. However, the government could not afford larger deficits. It was trying to manage a very tight fiscal situation.  What the government could afford for the provincial equitable share in the country overall, was 7 %. The fact that it grew faster in the Western Cape reflects the fact that there was faster growth in demand for services.

Regarding the allocation of the provincial roads maintenance grant, Mr Kenyon explained that it was allocated between provinces based on the extent of the road network, road usage and also climatic indicators.

Mr Kenyon pointed out that rail was not funded in this bill because it was a national competency in process.

Regarding the debt cost relative to allocations to local government, Mr Kenyon said that in 2019/20, NT was spending R202 billion on debt service costs, and R127 billion was allocated to local government.

NT had placed particular conditions on the R23 billion to Eskom. The funds would flow only once those conditions had been met. The intention was to keep a tight rein on those funds. They had also been allocated for a particular purpose, to ensure the financial sustainability of Eskom.

Regarding the energy efficiency demand side management grant, NT could share with the Committee a letter from the Department of Energy and revised allocations in the Division of Revenue Bill annexures, in which the NT listed the breakdown per municipality for all the grants. Section 16 of the Act required the Minister of Finance to gazette those allocations. That was the gazetting that had been referred to in the presentation. As soon as the Bill has been signed by the President, NT would have two weeks to gazette those allocations.

Regarding the accuracy of road management data, NT was aware of some challenges with the data the districts had collected and some of the incompleteness of that data. That was what the NT was referring to in the presentation about improving both the accuracy and the use of that data.

Mr Kenyon said that NT did not classify municipalities as poor due to failure in governance. According to NT's framework for analysis, NT tried to look at the revenue potential of municipalities. It was not that poor municipalities were badly run. In the determination of allocations, NT took account of the revenue potential and not their most recent performance.

Regarding Sanitary Dignity, the funds were allocated through the provincial equitable share. NT was aware that each province had an existing programme on Sanitary Dignity, and it was run differently in each province. This was why the funds had been allocated through an unconditional allocation in the equitable share.

Mr Maake said that the R2.8 billion was an indirect grant that the national Department would spend on behalf of the province purely for the eradication of pit latrines. Regarding the TB grant, slide 20 showed the breakdown of the grant. The three provinces listed on the slide were only in relation to the malaria component. In terms of TB, the Western Cape would receive almost R200 billion over the next three years.

Mr Maake agreed with the Chairperson on the issue of policy, on the principle of the equitable share. However, NT wanted the formula to be consistent with the adopted policy that government puts in place. State institutions needed to be capacitated to be able to make policies that responded to the socioeconomic indicators of the country.

Mr Kenyon said that the percentage for administration of the FLISP had been limited to 5%.

The Chairperson asked for an explanation on the National Health Insurance (NHI). There had been a pilot project for many years -- where was it now in terms of the roll-out?

Mr Kenyon responded that progress was being made on the NHI. The NHI Bill had been discussed in Cabinet, and it would soon enter the Parliamentary process. Following that, the NHI fund would be established.

Mr Mackenzie asked how the government paid the debt servicing cost. Did the rand exchange rate have an impact on paying the debt servicing cost in the coming financial year?

Mr Kenyon responded that these were the debts of the national government which it borrows on behalf of the three spheres of government for operating expenditure. He recommended chapter seven of the budget review for Members who were interested in how the debt repayments were structured.

He added that it was a common misconception that South Africa borrows a lot in dollars, so the country had very little foreign denominated debt. There was quite a lot of debt that was owned by foreigners, but they bought it in rands. South Africa was very fortunate that it was able to issue a lot of rand-denominated debt, but still get foreign loans.

Draft Committee Report on Negotiating Mandate on Division of Revenue Bill.

The Chairperson asked the Committee members if they had any comments

Mr Mackenzie said that the Committee could not support the Bill. It was clear that more money was being spent on servicing debt than on delivering services to the people.  The Province had also received less money, despite the increased servicing needs.  Education was consistently getting more learners, but the province was not getting the required funding.

Mr M Mnqasela (DA) said that it did not make sense for the Province to continue to be undermined based on its very good performance as compared to other provinces, which had growing patterns of wasteful expenditure, irregular and unauthorised expenditures, and growing levels of corruption, and people were left unpunished. The Western Cape Province had never had any of those activities, but it was continuously being punished despite the growing population in the province. This was an insult to the people of the Western Cape. The government was not prepared to spend money on the province. With that, it was clear that the Committee could not support the Bill.  

The Chairperson read the Committee report:

The Budget Committee, having considered the subject of the Division of Revenue Bill B5-2019 from the NCOP, referred to it in standing rule 220, confers on the Western Cape delegation to the NCOP authority, to not support the Bill.

The meeting was adjourned.

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