Provincial Treasury on Quarter 1 performance; FFC on 2019/20 submissions for Division of Revenue

Meeting report

The Chairperson welcomed the Financial and Fiscal Commission (FFC), Provincial Treasury (PT), Members of the Committee and members of the public to the meeting. She apologised on behalf of MEC David Maynier, Ms L Botha (DA) and Mr M Kama (ANC), who were unavoidably absent from the meeting. Due to the importance of the Committee's functions, it usually invites Chairperson from other Committees, other political parties and other stakeholders to its meetings. The PT and the FFC will brief the Committee separately after which the Committee will conduct its internal business.

Presentation by the Financial and Fiscal Commission

Submission for the 2020/ 21 Division of Revenue

Professor Trevor Fowler, the Commissioner of the FFC, said the presentation is based on Section 214 (1) of the Constitution (1996), Section 9 of the Inter-Governmental Fiscal Relations Act (1998), and Section 4(4c) of the Money Bill Amendment Procedure and Related Matters Act (Act 13 of 2018). The role of the FFC is to ensure the equitable division of revenue nationally among the various Provinces and local governments. It is important that Local Governments are re-positioned. The White Paper on Local Government was published 20 years ago. The local governments have achieved a lot over the years in terms of electricity, water and other services. However, the performance of local government is declining due to some challenges. Research from The Department of Cooperative Governance and Traditional Affairs showed that only 1/3rd of the municipalities functioned well in 2014. This observation was supported by the findings of the Auditor-General in the 2016/ 17 and 2017/ 18 financial years. 2/3rd of the municipalities were dysfunctional. No significant progress has been achieved despite the various interventions from the national and provincial governments. FFC's presentation addressed:

• Local government sustainability
• Local government fiscal framework
• Municipal government capacity building
• Local government infrastructure management and efficiency and
• Local government structure: The City-region design and its potential to address South Africa's development challenges.

Local Government Sustainability
Dr Henry Eksteen of the FFC said that the number of dysfunctional municipalities is on the rise. Economically, the Local governments are important because they are the closest to the people. Therefore, resolving the challenges at this sphere of government will help to solve the numerous challenges confronting the nation. The sustainability of municipalities continues to be at risk due to poor financial management in most cases. The Auditor General reported that just 56% of municipalities had funded budgets in 2017 and this is a serious problem across the country. The remaining municipalities adopted unfunded budgets. Profiteering from procurement processes is endemic in the local government sphere and municipalities own revenues are declining. Most municipalities could not access transfer payments because of under-collection of revenues. Low economic growth reduces the amount of funds available for sharing. There is an unhealthy balance between core and non-core municipalities’ services and asset management is poor. Accountability structure and oversight institutions in the local government sector are week and poorly capacitated. The Western Cape Province has the lowest unemployment rate and poverty compared to other Provinces, but there is room for improvement. Most municipalities depend on electricity revenues, which are rapidly declining. Water and refuse revenues are declining marginally, whereas property rates and employee-related costs are increasing marginally. The Province has one of the best audit outcomes in the country. The problems of unfunded budgets are lowest in the Western Cape Province. The country faces enormous challenges with District municipalities. Half out of the 55 dysfunctional municipalities are District Municipalities. This has implications for development going forward.

Local Government Fiscal Framework
The roles and responsibilities assigned to the local government have expanded but revenues have not actually expanded commensurately since the White paper on Local Government was adopted in 1998. There is diminishing buoyancy in traditional own revenues. Municipalities cannot count on transfer payments due to revenue under-collection and more funds are being tied up in interest payment. Also, fiscal consolidation reduces the amount of funds available for sharing. Other challenges include poor budgeting, lack of adequate cash flow management and efficiency, poor billing system and debt management. All these worsen the debt crisis. Most municipalities owe Eskom and water Boards and some of them do not remit money to South African Revenue Service. Why are municipalities not optimising the traditional own revenues? Why are municipalities in debt crisis? What are the financing instruments and arrangements that municipalities can adopt in order to address some of the challenges? Most rural municipalities and small towns are less efficient compared to the metros. The internal challenges resulted from poor billing systems, inconsistent property registers, increasing number of indigents, inappropriate credit control policies, lack of qualified administrators and property values, and inaccurate valuation. Unaffordability represents an important external constraint. Low economic activity and backlog of title deeds for properties and inability to implement credit control policies in areas supplied by Eskom are serious problems. Unfortunately, Eskom does not demonstrate the willingness to disconnect non-paying customers. Further, municipalities cannot fulfil most of their mandates because most government institutions and public entities do not pay for the services they enjoy. Most of them do not comply with the 30-day rule. The FFC proposes certain supplemental revenues, which include development charges, environmental charges linked to mining activities, fire levies and amusement taxes. Municipalities can also adopt land capture mechanisms to boost revenue collection. The Minister of COGTA, in collaboration with the President of SALGA, should ensure the alignment between the credit control systems of municipalities and Eskom in order to optimise traditional own revenues. Provincial Governments should link small municipalities together in order to attract qualified valuers. This has the potential to provide certain services in those municipalities. The Minister of COGTA, Minister for Finance and President of SALGA should facilitate capacity building in local municipalities, especially those with limited resources to develop effective credit control systems. The Minister for Finance should add development charges, tourism levies and land capture mechanisms as supplemental revenues and these should be integrated into the allowable sources of revenues for municipalities.

Municipal Government Capacity Building
Ms Sasha Peters, a Researcher with the FFC, said the Commission evaluates some interventions that could improve the functionality of municipalities. The interventions include the Back-to-Basics Programme and Minimum Competency Regulations. Research shows that a lack of common definition of what constitutes functional municipalities is a major problem. There should be an agreement on what constitutes functional municipalities as this helps to guide interventions that improve the efficiencies of municipalities. Financial management, governance, human resources, political management, leadership and service delivery are important to optimise efficiency in municipalities. The Back-to-Basics Programme, in its original design, is ambitious and the indicators to measure its effectiveness are outside the control of municipalities. Also, there are no data to measure the outcomes of the programme.

The minimum competency regulations were gazetted in 2007, which basically represented the National Treasury attempt to professionalise strategic finance-related positions within municipalities. This regulation sometimes had negative impacts on municipalities and only 46% compliance was achieved in 2007. The regulation should be reviewed in order to lessen the burdens on municipalities. The role-players, tasked with capacity building in most municipalities, are not properly coordinated. COGTA, SALGA, the AG and other role-players tend to implement different strategies to improve performance of municipalities.

The municipalities, Minister for Finance and President of SALGA should lead the development of a government-wide accepted definition of municipal functionality. The factors for measuring functionality of municipalities should exclude those factors that are outside the control of municipalities. The municipalities should narrow the scope of the Back-to-Basics programme and the outcomes of this programme must be measurable and easily monitored. The municipalities should ensure adequate alignment and coordination among the various role-players involved in capacity building in municipalities in order to avoid duplication of roles, responsibilities and government arrangements. The municipalities and Minister for Finance, in collaboration with Provincial Governments, should prioritise technical support whenever new systems are being implemented in municipalities. The Minister for Finance should conduct regular assessment of Minimum Competency Regulations in order to monitor the level of compliance.

Local government infrastructure management and efficiency
Infrastructure development really relies on government stimulus package and long-term developmental agenda. On aggregate, municipalities spend more than R40 billion on infrastructures annually. Meanwhile, Local Government infrastructure delivery performance and spending efficiency are sub-optimal. Regulatory, institutional and management framework for the delivery of Local Government infrastructure is burdensome for most municipalities. Deficiency in infrastructure delivery management is another challenge that confronts municipalities. For example, a housing project in the City of Johannesburg costs about R221 million and was due for completion in 2016. However, it was only 55% completed at the end of the last Financial Year. The contractor was paid in excess of R22 million of the original contract value but there was no value for money. The rapid transport system in Rustenburg, estimated at R3 billion, started in 2012 and had the completion date of 2016, was only 40% complete at the end of 2017. There was no indication on the total cost incurred for this project. The structure and composition of Local Government infrastructure funding is another challenge.  There is no coordination among various role-players in this regard and this has severe consequences for integrated development planning and accountability. Municipalities are seemingly overwhelmed by the scale of infrastructure needs as well as administrative and regulatory processes associated with the delivery of infrastructure. The Minister for Finance and municipalities, as part of the on-going Local Government infrastructure grant reforms, should jointly strengthen the linkage between technical project planning processes and budgeting as this fosters smooth inter-governmental infrastructure coordination. Key sector Departments should have the authority to carry out infrastructure support mandates. The roles and responsibilities of various role-players should be clearly defined when it comes to water and electricity services. All role-players must collaborate to ensure effective infrastructure delivery in municipalities across the country.

Local government structure: The City-region design and its potential to address South Africa's development challenges
The concept of City-region concept refers to the association of different municipalities or an incubated cluster of cities. This has the potential for improved service delivery and sustainable development. This allows for cross-subsidisation among inter-linked areas. The areas might be within a Province or even in separate Provinces. The system has proven successful in San Paolo (Brazil), Metropolitan region of Barcelona (Spain), Bangkok (Bangladesh) and Mexico City (Mexico). Successes from international case studies include horizontal collaboration and successful delivery of projects, legislation and supporting institutions, incentives for regional collaboration and coordination, and reform in metropolitan legislation. Challenges lack of effective mechanisms for coordination across a region and lack of financial incentives to encourage collaboration and cooperation, amongst others. The lessons learnt were applied to the Gauteng City Region (GCR). The municipalities should assess the requirements of key success factors for city regions to address inclusive development and Local Government service delivery failures.

Discussion
Mr G Bosman (DA) commended the presentation as it gave a comprehensive overview of a very complex governance framework in Africa. At the moment, infrastructure planning is not well-coordinated at the Local Government level. Has COGTA done any work to review local government framework? Is there any work in the pipeline? In relation to the City-region initiative, has various role-players considered the Aerotropolis model being developed in Ekuhuleni and similar development in the City of Cape Town? It is important to consider transit-oriented development approach to address the challenges that could confront public transport that link various areas of the City-regions.

Mr R MacKenzie (DA) sought clarity on the status of the FFC's recommendations.  It is important that authorities implement the recommendations of FFC. What is the FFC doing to address the underlining challenges, which include endemic corruption and outstanding debts? There cannot be real progress infrastructure the challenges persist; even infrastructure addition grants are allocated to municipalities. FFC should collaborate with the National Prosecution Authority (NPA), the Hawks and the Department of Justice (DoJ) to ensure accountability and monitoring. Has any meeting taken place between the Ministers of COGTA, Local Government and the President of SALGA? The meeting should take place so we do not sit with the same problem for a prolonged time. The lack of coordination between various role-players on the Back-to-Basics programme is worrisome. The lack of coordination indicates that the programme will fail.

Ms D Nkondlo (ANC) sought clarity about how various role-players are implementing FFC's recommendations.

The level of corruption in the country is alarming, especially at the national level as revealed by the Zondo's Commission. What is FFC doing to address the corruption challenge, which is fast becoming endemic at all levels of governance? International and national investments should have positive impacts on host communities. FFC should facilitate adequate inter-governmental coordination to ensure that investments in communities lead to local economic development. In particular, Atlantis and similar communities should benefit from the corporate social responsibilities of businesses operating in their areas. Excessive attention is attached to both National and Provincial entities in terms of capacity building, skills and resources. Meanwhile, Local Government has recorded under-performance consistently. What are the measures to ensure that Local Government is well capacitated to ensure effective service delivery to local communities?

Mr Petrus Marais (FF+) said that poor people lost their houses because they cannot afford the property rate. They do not have control over the property's value, which is often affected by inflation and location. The poor people are often forced to relocate to poorer communities, where they do not have the pressure of high property rate. Property rate should be subsidised for the poor. The rich should subsidise the poor and not vice-versa. Should property rate be based on a person's ability to pay or on the value of the property? The rates of commercial properties should be based on profit making. He sought to know FFC's view on scrapping of the Regional Service Council Levies (RSCL), which in the past was used to upgrade poor communities. The removal of the levies served to disadvantage black and Coloured people of. This makes White communities richer at the expense of Black and Coloured communities because most Blacks and Coloured people spend their money in white communities. The income from properties will decrease if poor people come close to affluent areas if rates are based on the value of the property. There should be a new vision for a new South Africa based on a new model.

The Chairperson said that the FFC is only responsible for advisement and recommendations. The entity does not have the mandate to implement its recommendations. Certain questions are better resolved by appropriate Committees. She sought to know the WC Representative at the FFC. The Province is concerned about the National Treasury's request to cut its budget by R13 billion. Where will the money come from? Will the fund be cut from schools, hospital and clinics? Page two of the Special Appropriation Bill for Eskom stated that Eskom faces dire financial constraints and needed financial support in order to fulfil its mandate. Eskom needs additional financial support of R26 billion for the 2019/ 20 Financial Year and R33 billion for the 2020/ 21 Financial Year, amongst others. Where will Provinces source this money?

Responses
Dr Eksteen said the Legislature plays important roles in the implementation of FFC's recommendations. By law, FFC makes recommendations to the National Parliament. The NT, on behalf of all government Departments, considers FFC's recommendations and act accordingly. The FFC sometimes provide a list of recommendations, previous recommendations and the recommendations that were accepted and implemented. The FFC also facilitates the implementation of its recommendations through engagements with relevant Parliamentary Committees and other forums. It is important that Local Government incorporate FFC's recommendations in their policies. COGTA is vital to the success of Local Government. COGTA works actively with District Municipalities, which have been elevated to play vital roles in local development. COGTA coordinate activities at Local Government level but the progress is currently low. Most government entities take FFC's recommendations seriously and FFC sometimes monitors the rate of implementation. Corruption is a thorny issue. The FFC interacts with government Departments and recommends ways to tighten up the system in order to eliminate corruption. It is important to note that FFC is not responsible for implementation of the recommendations. The Committee should ensure appropriate oversight of various Departments in order to address the issue of corruption.

Ms Peters said that the FFC tested the concept of City-region initiative in Gauteng City region. The City-region initiative aims to inter-connect places within a city or a region. This is essential for effective public management and service delivery. Provincial Governments plays important role in the development of municipalities. Section 154 of the Constitution obligates Provincial Governments to build capacity in municipalities to enable them deliver basic services and manage administration.

Professor Fowler acknowledged that the Back-to-Basics programme does not have any positive significant impact at the moment. The programme was not adequately scoped. The real impact of the project should be measured in terms of basic services like electricity and water, among others. It is worrisome that there is a general deterioration in the programme. It is concerning that the nation needs special appropriation to deal with the financial challenges confronting Eskom. The FFC will be at the National Parliament on 3 September 2019 to discuss the Special Appropriation with the Standing Committee on Appropriation. In response to Mr Marais' question on whether the value of property should be based on affordability or market value, Professor Fowler said that the value should be based on the market value of the property. The Committee and other relevant Committees should ensure adequate oversight of the Executive in order to ensure accountability. This will go a long way to curb corruption. The Provincial Governments should be able to adopt Section 139 of the Constitution to take over the functions of struggling local municipalities. The Provincial Governments should familiarise themselves with the mandates of the FFC as contained in relevant sections of the Constitution. The Infrastructure Delivery Model, from the NT, contains useful data on the impact of infrastructure delivery in the nation as it reveals the sources of all deviations in infrastructure projects. In response to Mr Marais' concern about spatial planning, Professor Fowler said the nation must accept that urbanisation is real. More people will definitely migrate into urban areas. The nation should properly plan for urbanisation so that people do not become victims of the initiative. The NT scrapped the Regional Service levy because it represented double taxation on companies and it limited economic expansion. There must be co-existence between the poor and the rich in order to address the inequality challenge in the nation. This has been successfully implemented in India.

Dr Eksteen said that the FFC has nine Commissioners. The term of some of the Commissioners will expire soon and the President has the mandate to appoint new ones. Two Commissioners are appointed by organised Local Government and Professor Fowler is one of those two. Some Commissioners are appointed by the Provinces. All Commissioners are accountable to the national Commission and not Province or Local Government.

Discussion
Mr MacKenzie sought clarity about the concept of City-regions.

Mr Marais said the FFC and other role-players should consider the wage and the financial status of the poor when trying to integrate communities. The value of property is often determined by location. Urbanisation may take a toll on the poor because they may lack the means to cope with high property rates. For example, the worth of a two-bedroom apartment in Constantia is approximately the same as five-bedroom apartment in Mitchells Plain.

The Chairperson urged Mr Marais to forward additional questions to relevant authorities.

Mr Bosman said that the MECs for Local Government should be involved in the drive to implement the FFC's recommendations. The transit-oriented development has the potential to facilitate optimisation of space. It also provides more functional and compact cities, which reduces spending on infrastructure development because infrastructure is closer to one another. What is the advantage of City-regions compared to District municipalities or metropolitan areas?

Responses
Professor Fowler said the City-region initiative aims to inter-link cities or areas that have certain commonalities. For example, Rustenburg which is the fastest developing city in the country has a lot of similarities to the City of Johannesburg. The Cities does not have to be in the same Province but they must be close to each other as much as possible. City regions have the potential for greater impacts at reduced cost. The City-region concept is based on Economic-Hub approach.

Presentation by the Provincial Treasury

Budget Performance Outcomes for the First Quarter of 2019/ 20 Financial Year

Mr Julinda Gantana said the Province spent R15.4 billion (22.9%) of the overall R67.19 billion in the first Quarter of the 2019/ 20 Financial Year. The Province showed a net under-spending of R234.97 million. The projected net over-spending (R125.72 million) in the Department of Health (DoH) was due to the projected shortfall in the Human Resource Capacitation Grant (HRCG) allocation for critical posts and the expansion of the Grabouw Community Health Centre and the Global Fund (GF). The projected net over-spending (R113.64 million) in the Department of Transport and Public Works (DTPW) was largely due to the implementation of an integrated transport hub. The projected net over-spending (R4.31 million) in the Provincial Parliament was due to the new Parliament, as a result of higher than anticipated exit gratuity payments. The projected net under-spending (R3.56 million) in the PT was due to Compensation of Employees (CoE). The projected net under-spending (R5.15 million) in the Department of Local Government was due to delays in the filling of critical posts related to drought capacity.

The public entities spent R162.09 million (21.9%) of R740.10 million of the main budget in the first Quarter. As at the end of June 2019, the Western Cape Nature  and Western Cape Tourism, Trade and Investment Promotion Agency (Wesgro) had under-spending of R7.77 million and R908 000, respectively. Provincial own revenue collections at the end of the first Quarter amounted to R789.95 million or 26.9% of the R2.94 billion of the main budget. Main revenue contributors include the DTPW (R414.14 million), the DoH (R139.35 million), the PT (R160.61 million) and Department of Human Settlements (R2.99 million). Actual expenditure at the end of June 2019 stands at R1.90 billion, representing 20.8% of the main budget of R9.02 billion.

Ms Zeenat Ishmail, Chief Director for Strategic Management (PT), presented the non-financial performance of the PT for the first Quarter of the current Financial Year. 312 targets (75%) of the total 416 targets were achieved in the first Quarter. The Public entities achieved 72 (85%) out of the 85 targets. In terms of the Preliminary Performance, The Governance Cluster achieved 91%, Social Cluster 76% and Economic 64% of the targets. In terms of aggregate, 75 (18%) of the 416 targets were partially achieved and 29 were not achieved. The average performance was set at 75%. Seven Departments achieved above the average score. These include the Department of the Premier (DotP: 83%), Department of Economic Development and Tourism (DEDAT: 85%), Department of Community Safety (DoCS: 96%), Agriculture (DoA: 75%), Department of Local Government (DLG: 100%) and the DoH (76%). Six Department performed below the average. These include Departments of Education (DoE: 71%), Human Settlements (DHS: 58%), Social Development (DSD: 54%), Cultural Affairs and Sports (DCAS: 73%), Department of Environmental Affairs and Development Planning (DEA & DP: 40%) and DPTW (42%). The average preliminary performance for Provincial public entity is 85%. Public entities in the Social Cluster led the performance followed by Economic and the Governance clusters. Western Cape Liquor Authority (WCLA), Western Cape Language Commission (WCLC), Western Cape Cultural Commission (WCCC) performed excellently. Out of the 72 targets, 85% have been achieved in the first Quarter. Seven public entities achieved above the Provincial average of 85%. These include Liquor Licensing authority, heritage Western Cape, Cultural Commission, Wesgro, Saldanha Bay Industrial Development Zone (SBIDZ), and Cape Nature. The Western Cape Gambling and Racing Board (WCGRB) and Casidra achieved below the Provincial average.

Discussion
The Chairperson expressed concern about the proposed financial support for Eskom. A total of about R406 billion will be paid to Eskom in the next 10 years. Does the NT advise the PT on where the money would come from? Which Departments will be affected by the budget cuts?

Response
Ms Gantana said the budget cuts will definitely affect the funds allocated to the PT. The PT will strive to align with the strategic goals of the Sixth Administration. The Province will base its expenditure on own revenues. The budget cuts will affect the equitable share and the conditional grants allocated to the Province.

Discussion
Mr MacKenzie asked about the total amount the DHS got from the sale of land to the Airports Company of South Africa (ACSA).

Response
Ms Gantana said the total amount is R153 million but she promised to verify the figure.

Consideration of Minutes
The Committee adopted the minutes of the meeting held on 2 August 2019. The motion for the adoption was moved by Mr D Mitchell (DA). The move was seconded by Ms W Philander (DA).

Resolutions
Mr MacKenzie suggested that the Committee holds its meeting on Fridays from 9 to 12 so that Members of Muslim faith can have quality time for their prayers. Some Members suggested 2 to 5 pm but Mr MacKenzie said that 9 to 12 noon is more appropriate.

The Chairperson said the Committee will have to liaise with the Public Accounts Committee (SCOPA) to determine the appropriate time for the meeting. SCOPA also has meeting on Fridays. The Committee should request the FFC to submit the various reports of the research it conducted to the Committee based on the presentation. The recommendations on Local Governments should be referred to the Committee on Local Government for appropriate actions. The Committee should write to the Provincial MEC for Finance to oppose the proposed budget cuts from the NT. The Province and the Local Government should not suffer because of Eskom's failure.

Mr Mvimbi asked to know why the Chairperson wanted to oppose the cuts in budget. There has always been a drive to cut budgets. Does the Chairperson want an increase in budget? The Members should have a copy of the memo from the NT that proposed the budget cuts over the next three years. This will guide Members' decision on the matters related to budget cuts. It will also help to support the position of the Committee in future engagements.

The Chairperson offered to request a copy of the memo from the Provincial Treasury.

Ms Nkondlo suggested the Chairperson would have introduced the matter of budget cuts as a conversation, not as resolution. Members should be allowed to vote on the matter. The ANC, as a Party, is in support of budget cuts. On the other hand the DA opposes budget cuts and the restructuring of Eskom.

In response to Mr Mvimbi's concern, the Chairperson said that the matters relating to budget cuts is already public knowledge. Ministers and the Premier of the Province and the PT have addressed the matter. She noted that the budget cuts are treated separately from Provincial budgetary process.

Mr R Allen (DA) supported the Chairperson's opposition to budget cuts. Budget cuts will definitely impact negatively on service delivery to communities.

The Chairperson said the appropriate documentation from the NT will be circulated to Members. The budget cuts will affect conditional grants and equitable share allocated to the Province.

The meeting was adjourned.