Division of Revenue Amendment Bill [B15-2019]: Salga briefing & public hearings

Standing Committee on Appropriations

15 November 2019
Chairperson: Ms D Mahlangu (ANC, Mpumalanga) ; Mr S Buthelezi (ANC)
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Meeting Summary

The Standing and Select Committees on Appropriations heard submissions from the South

African Local Government Association (SALGA) and the Organisation Undoing Tax Abuse (OUTA) on the 2019 Division of Revenue Amendment Bill (DoRAB).

SALGA told the committees that the weaker economy meant that local government’s equitable share of national revenue would be cut by R3 billion over the Medium Term Expenditure Framework (MTEF). Conditional grants to local government would be cut by R14 billion over the MTEF.

Under-funding of local government would affect local economies and job creation. Municipalities’ own sources of revenue would in turn decline. SALGA called for a higher allocation of nationally raised revenue to local government, the restructuring of conditional grants to make them more flexible, and a national campaign to encourage people to pay for services.

A total of 146 municipalities were in financial distress. The cost base of local government had increased significantly without a concomitant increase in revenue.

OUTA submitted that the precarious state of local government was a stumbling block for foreign investors. There were unsustainable increases in the cost of water and electricity, and the supply was unreliable. There was a significant backlog in infrastructure maintenance. There was an urgent need to reassess the local government business model, because the present one had failed.

OUTA believed the DoRAB could be used to discourage financial delinquency by municipalities. Equitable share tranches which were due to be transferred on 2 December should be withheld from those who were heavily indebted to Eskom and water boards.

Committee Members expressed concern about the poor financial state of municipalities and the lack of consequences for those responsible for mismanagement.

Meeting report

The Standing and Select Committees on Appropriations held a joint public hearing on the 2019 Division of Revenue Amendment Bill (DoRAB). They heard submissions from the South African Local Government Association (SALGA) and the Organisation Undoing Tax Abuse (OUTA).

Submission by SALGA

Ms Thahane Lakhera, Senior Adviser: Municipal Finances, South African Local Government Association (SALGA) said that weak national revenue collections and a weaker economy meant that local government’s equitable share of revenue would be cut by R3 billion over the Medium Term Expenditure Framework (MTEF).

Conditional grants to local government would be cut by 11 per cent, or R14 billion over the MTEF. The biggest cuts would be to the Urban Settlements Development Grant (USDG) and the Public Transport Networks Grant.

A large number of municipalities were in poor financial health. Revenue collection challenges were reflected in a debtors’ book of R165 billion at the end of June. Government departments owed R10.2 billion. Municipalities owed creditors R60 billion at the end of June. Many households simply could not afford to pay their accounts. A total of 146 municipalities were in financial distress. The cost base of local government had increased significantly, without a concomitant increase in revenue.

Eskom supplied electricity directly to 50 per cent of households, despite this being designated a municipal function. This meant that billions of rands a year in revenue was foregone by municipalities.

SALGA submitted that local government was under-funded over the MTEF. This would have a detrimental effect on local economies, job creation and social well-being. Municipalities’ own sources of revenue would in turn decline. It suggested ways of filling the funding gap:

Higher allocation of nationally raised revenue to local government.

Restructuring conditional grants to make them more flexible, and providing funds for maintenance in infrastructure grants.

Reviewing the way in which municipal areas were demarcated to ensure the financial viablity of municipalities.

National incentives to force commercial customers to settle their debts.

Reduction of reporting and compliance burdens.

Removing Eskom from the municipal electricity distribution market.

Addressing confusion about the respective powers and functions of local government and other parts of government.

Requiring other parts of government to settle their outstanding accounts with municipalities.

SALGA submitted that the current structure of conditional grants was counterproductive. The funding was unpredictable and could be withdrawn to “punish” municipalities. It did not address actual needs and forced municipalities into programmes that did not reflect local priorities. Infrastructure dynamics had changed, and the focus now had to be on maintenance.

SALGA was currently finalising proposals for dealing with the problem of water and electricity debt for submission to the Cabinet. These were:

Installation of smart electricity and water meters.

The appointment of independent revenue collectors for municipalities.

A government-wide campaign to encourage a culture of payment for services.

Restructuring of debt.

SALGA had noted “loud and clear” the poor audit outcomes resulting from a lack of accountability. It had developed a consequence and accountability framework which would provide municipalities with one source for all the relevant legislation.

Discussion

Mr S Aucamp (DA, Northern Cape) commented that SALGA’s presentation painted a bleak picture. The municipal level of government was where services were delivered to households. Bad management meant that they were failing the people, and there were no clear plans for a turnaround strategy.

Ms A Randall (DA), a member of the Gauteng legislature, said there was an urgent need to overhaul supply chain management processes. Gauteng had introduced an open tender system, but there were teething problems. Projects were being disrupted by local business forums because they had not been awarded contracts. Municipal networks were being sabotaged. For example, blocks of cement were thrown into sewage canals, forcing the municipality into emergency tenders. There should be an audit of municipal land. The Financial and Fiscal Commission (FFC) had suggested that municipalities could sell land to attract private investment. Rehabilitation programmes for indigent households were non-existent.

Mr D Ryder (DA, Gauteng) said he was not unsympathetic to SALGA’s needs. They had provided a stark indication of the budget cuts that would have to be made. There was a need to reprioritise spending. “Instead of a Mercedes Benz for the mayor, there should be five more standpipes in the informal settlement,” he said. Removing Eskom from the municipal electricity market was an interesting idea, but the costs of providing electricity reticulation would not be affordable for smaller municipalities. He asked SALGA to elaborate on its proposal that municipal demarcation should be reviewed. Who would do this? The Municipal Demarcation Board did not have the capacity.

Mr S du Toit (FF+, North West) referred to the inter-ministerial task team (IMTT) recommendation that municipalities should use independent revenue collectors, saying the Auditor General (AG) had pointed to the high charges that some of them levied. Collection should be done in-house.

Mr J Mpisi (ANC), Gauteng Legislature, asked whether SALGA agreed that the public service wage bill should be reduced and, if so, what steps they would recommend. What steps were SALGA taking to reduce corruption and incompetence? As to non-payment for services, perhaps a flat rate should be introduced to help establish a culture of payment. In Limpopo Province, government departments that were in arrears with their payments to municipalities were having their services cut by the Polokwane Municipality. This should be rolled out in other provinces.

Mr D Joseph (DA) suggested that the National Treasury should take responsibility for placing chief financial officers at municipalities.

Mr K Ceza (EFF), Mpumalanga Legislature, called for a thorough investigation into the reasons for non-payment for services. A perception should not be created that people were pretending they were unable to pay.

Mr X Qayiso (ANC) asked how much the business sector owed municipalities.

Mr O Mathafa (ANC) said a billing crisis in some municipalities was one reason why people were not paying for services. There were big variations in the amounts billed without any explanation being given.

Ms D Peters (ANC) asked whether SALGA would support a call for a fuel levy to support road infrastructure development, as well as a possible one per cent increase in VAT for the same purpose at some time in the future. Good road infrastructure was a key to economic development in municipalities. She suggested that there should be a campaign to establish a “culture of some payment” along the lines of the 1995 Masakhane Campaign. National government did provide a cushion of free basic services for the poorest people.

Co-chairperson Mahlangu suggested consideration should be given to a system where Eskom dealt directly with end-users of electricity. A card system would overcome people’s scepticism about municipal billing. She said SALGA and the appropriations committees needed to monitor mitigation plans to deal with management failures reported by the Auditor General.

Co-chairperson Butrhelezi said the SALGA presentation had raised important issues, and the committees should spend more time considering them. He asked what role SALGA played in the formulation of the National Treasury’s medium term budget policy statement (MTBPS). He had not heard any reference to a debt collection strategy.

SALGA’s response

Cllr Mpho Khunou: Chairperson of SALGA’s finance committee, responded that SALGA would welcome further engagement with the committees on local government issues.

On the MTBPS, he said SALGA participated in budget forums where, year on year, it raised issues about local government funding, but these were not resolved. Local government was “grossly under-funded,” and the proposed reductions of R3 billion in local government’s equitable share of national revenue, and R14 billion in conditional grants, would have an impact on service delivery and employment. SALGA did not support the cuts proposed in the MTBPS.

SALGA had developed a consequence management framework for dealing with management failures, and was working with municipalities and the Department of Cooperative Governance and Traditional Affairs (COGTA) to ensure it was fully implemented. There was a requirement that accounting officers report irregular expenditure to the police for investigation. However, these investigations took a long time. The police needed more capacity to ensure full consequence management which would result in people going to jail for transgressions.

Mr Khunou said SALGA would not support the wholesale selling of municipal land. It should be linked to local economic development plans and spatial frameworks.

On municipal demarcation, he said there were instances where municipalities had been amalgamated without sufficient consideration of whether this would produce a viable municipality. There was a need to reconsider how this was done.

He said it would not be viable for municipalities to charge a flat rate for services. The charge had to cover the cost of providing the service. He agreed that there had to be a national drive to get people to pay for services. There had to be a massive roll-out of smart electricity meters so that the supply could be switched off when people did not pay.

SALGA had until now avoided confrontation with government departments that did not pay for services, but it would now have to follow the example of Polokwane in collecting what they owed.

During a follow-up discussion, Mr Ryder challenged an assertion by Mr Khunou that the Constitution gave municipalities an exclusive right to supply electricity. He said national and provincial government also had these powers. He agreed with SALGA that local government was under-funded. However, this was not the view of the National Treasury. SALGA needed to get together with others in lobbying for more funding.

Ms Peters asked what SALGA thought of a proposal that municipal budgets should be “top sliced” to deduct money that they owed to Eskom.

Mr Khunou said SALGA’s view of local government’s constitutional authority to supply electricity was backed up by a legal opinion. He agreed with Mr Ryder on the need to lobby for more funds.

Withholding municipal funds to pay Eskom would be a “death sentence” which would result in the complete collapse of half the municipalities. There was always an emphasis on what municipalities owed Eskom, but what about government departments which owed municipalities?

Co-chairperson Buthelezi ended the discussion by remarking that money was not a panacea for the problems facing local government. Reports by the Auditor General had shown the “pathetic state” of municipal financial management. It was difficult to allocate more resources when they were not taken care of.

Submission by OUTA

Mr Buthelezi invited to make a presentation

Mr Godfrey Gulston, Chief Financial Officer (CFO): Organisation Undoing Tax Abuse (OUTA), urged Parliamentary committees to ensure that public representations to them had an impact on the division of revenue. They could make this happen by “prioritising constituency demands over political expediency.”

The precarious state of local government was a stumbling block for foreign investors. There were unsustainable increases in the cost of water and electricity, and the supply was unreliable. There was a significant backlog in infrastructure maintenance. There was an urgent need to reassess the local government business model, because the present one had failed.

OUTA believed the DoRAB could be used to discourage financial delinquency by municipalities. Equitable share tranches which were due to be transferred on 2 December should be withheld from those who were heavily indebted to Eskom and water boards, and used to pay Eskom and the water providers directly. The same should be done to municipalities that had passed unfunded budgets. Consideration should be given to withholding grants for the Integrated National Electrification Programme (INEP) from those who were in default to Eskom.

OUTA believed that funding for the remediation of pollution in the Vaal River System was “incoherent.” The emergency intervention to fix the collapsing sewerage system was estimated to cost R1 billion. It now appeared that R241.9 million allocated to the Emfuleni Municipality to fix this problem had not been spent and was being rolled over.

OUTA believed a grant for eradicating inappropriate school infrastructure and sanitation should not be cut by the proposed R40 million. Although this was only two per cent of the total grant, it was needed to support some of the most vulnerable and voiceless people.

Health experts should be consulted before cutting the grant for Human Papilloma Virus (HPV) vaccinations. This was being done because the target group had been changed to grade 5 girls, and it was assumed that most would have been vaccinated while in grade 4. Assurance needed to be given that limiting the vaccine to children in just one grade would not be a significant risk to prevention.

Discussion

Ms Peters asked if Mr Gulston believed a different constituency-based electoral model would produce better oversight. She reminded him that Members of Parliament were assigned to constituencies, and that time was set aside for them to do constituency work. She said the proposal that equitable share tranches be withheld to pay for electricity and water would have implications for the delivery of other services. She asked what OUTA intended by calling for the withholding of grants for the INEP, as this programme was intended to provide electricity to those who had none. It was for the poorest of the poor.

Mr Z Mlenzana (ANC) questioned whether it would be legal to withhold grants which had already been allocated.

Mr Ryder said that instead of calling for no cuts to the School Infrastructure Backlog Grant, OUTA should be calling for it to be rolled over to next year. The money had not been spent and the Treasury had to reallocate funds. He found OUTA’s analysis of the Mfuleni issue to be fairly superficial. There were intertwined factors having to do with state capture, non-payment of Eskom and water pumps that could not run.

Mr Joseph asked what OUTA meant by stating that public hearings had no impact, and that there were no oversight mechanisms.  

Mr Gulston replied that COGTA and the National Treasury should exercise oversight over municipal finances. OUTA had designed an oversight mechanism which would help municipalities pick up problems at an early stage.

OUTA had serious misgivings about Emfuleni. There was a lack of project planning and the full financial implications of the turnaround plan were not known.

He told Ms Peters there was a need to look again at how constituency work was done. The dilemma was that MPs’ first loyalty was to their political parties.

National Treasury response

Mr Steven Kenyon, Director: Intergovernmental Relations, National Treasury, responded to issues raised at the hearing.

He agreed that there was a need for a deeper conversation with SALGA and COGTA on local government issues, where there were very difficult choices to be made.

On the question of the reallocation of grants, he referred to the example of the Integrated Public Transport Networks Grant. This had been available to 13 cities for a decade, yet only six had operational systems as a result of the grant. Repeated non-performance could not continue. Funds had to be concentrated where there would be delivery.

Mr Kenyon said the Division of Revenue Act (DORA) could serve as an oversight bible for MPs. It provided clear tools and mechanisms, and if everyone followed the rules, the system would work.

He found it puzzling that SALGA focused on the need for the Municipal Infrastructure Grant to provide funds for maintenance of infrastructure, when 10 per cent of local government’s equitable share of national revenue was provided for this purpose.

Mr Kenyon also supplied the committees with written responses to issues raised at a joint meeting the previous day. There had been no time at that meeting for responses to be made.

Closing the discussion, Mr Buthelezi said SALGA and the Treasury should “spend more time together” in resolving their differences. Municipal finances were deteriorating year by year. There were some chief financial officers who could not read a balance sheet, and whose job was to appoint consultants to prepare their budgets.

The meeting was adjourned.


 
 

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