Division of Revenue Bill [B3-20]: briefing

Standing Committee on Appropriations

12 March 2020
Chairperson: Mr X Qayiso (ANC) (Acting)
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Meeting Summary

In its briefing on the Division of Revenue Bill, National Treasury said that the country’s population had increased by 1 million from 2018 to 2019 bringing it to about 58.8 million. There were 49.1 million people dependent on public healthcare and 13 million learners in schools with 9 million receiving free daily school meals and 10.4 million poor households receiving free basic services. GDP was expected to grow by 0.9% in 2020 although debt service costs amounted to 15.2% of the 2020 Budget Revenue and that as a result the  budget had to make a reduction of R156.1 billion in non-interest spending.

Despite reductions to the provincial and local equitable share, Treasury emphasised that after accounting for the impacts of inflation and population growth, equitable share allocations sustain the same level since 2013. Provincial equitable share reductions were:
• Reduction of 2% of non-wage spending
• Technical adjustment due to lower projected CPI inflation
• Further planned reductions will be offset by lower wage costs.
Local government equitable share reductions eliminated R3.2 billion in unallocated funds set aside to provide for higher bulk cost increases

Conditional grant funds are still in line with allocations over the last decade after taking account of inflation (but unlike equitable shares, grants have not kept pace with population growth)
• To manage the impact on services, the amount reduced from each grant considers:
• Past spending and performance.
• Whether it funds salaries, medicines and food.
• Whether there has been significant real growth in allocations in recent years.
• Larger reductions are also made to grants to urban municipalities, which have more capacity to offset the effect of cuts by increasing their own revenue investments.

Most of the Bill clauses remain the same from one year to the next but changes to the 2020 Bill deal with
Built Environment Performance Plan (BEPP) exemptions; provision for possible municipal boundary changes; improving grant administration by national departments, provinces and municipalities.

The provincial equitable share formula is updated to reflect changes in demand for services. Additions to the formula include reprioritised funds for:
• Sanitary dignity (R652 million)
• Gender-based violence support (R316 million)
• Social worker support shift (R398 million)
The review of the formula in 2020 will include work on the education, health and poverty components and on the cost of rural services. The local government equitable share formula updates and changes made to the provincial and local government conditional grants were noted.

Members were concerned that the 2% reduction would hinder economic growth in municipalities. They asked about Buffalo City, Msunduzi and Mbombela being suspended from the Public Transport Network Grant. They asked for the formula used by Treasury to calculate the GDP forecast; if Treasury had capacity to ensure the proposed programmes could be completed within budget with no need for additional funding. There needed to be collaborative teamwork between provinces and local government to ensure improved efficiency. Members asked if Committee recommendations on division of revenue had been considered.

Meeting report

Division of Revenue Bill 2020: briefing
Ms Malijeng Ngqaleni, Deputy Director General: Intergovernmental Relations, who is Acting Director General of Treasury, said that the country’s population had increased by 1 million from 2018 to 2019 bringing it to about 58.8 million. There were 49.1 million people dependent on public healthcare and 13 million learners in schools with 9 million receiving free school meals daily. 10.4 million poor households receive free basic services - and this number had increased by 250 000 from 2019.

She stated that the economic outlook was weak and real GDP was expected to grow by 0.9% in 2020, 1.3% in 2021 and 1.6% in 2022. Public finances had continued to deteriorate, causing a low growth that had led to R63.3 billion downward revisions to tax revenue estimates in 2019/20 relative to the 2019 Budget. Debt was not projected to stabilise over the medium term, and debt service costs now absorbed 15.2% of main budget revenue. In response, the 2020 Budget had made net non-interest spending reductions of R156.1 billion in total for the next three years and that there were reductions to baselines of R261 billion, which included a R160.2 billion reduction in the wage bill of national and provincial departments, and national public entities. There were reallocations and additions totaling R111.1 billion, of which R60.1 billion was set aside for Eskom and South African Airways (SAA), and R24 billion for critical spending priorities.

She discussed the Division of Revenue for the 2020 MTEF, stating that provincial and local allocations had grown above inflation and that equitable share was growing faster than conditional grants. She highlighted that debt service costs were outpacing all other categories of spending and the transfers to SOEs resulted in a higher share for the national government sphere in 2019/20.

Treasury was working on sustaining spending, funded through equitable share funds, giving a summary of the reductions as: 2% reduction on non-wage spending (R7.3 billion over MTEF) and technical adjustment due to lower projected CPI inflation (R5.2 billion). Further planned reductions would be offset by lower wage costs. The local government equitable share had reductions that eliminated R3.2 billion in unallocated funds set aside to provide for higher bulk infrastructure cost increases.

Treasury and the provincial treasuries had worked to get municipalities to revise their 2019/20 budgets and now ¾ had funded budgets while the remaining 66 municipalities were asked to revise their budgets to ensure adequate cash flows to cover this financial year’s commitments.

On the development of a pipeline of investment-ready projects in metros, she said that weak project planning was one of the biggest constraints to municipal infrastructure investment and that well designed projects had the potential to attract more private investment and borrowing.

Following consultations with cities, in 2020/21 cities would be able to use at least half of their Integrated City Development Grant allocations for programmes and project preparation activities, from which the remaining allocations could be used to tie-up any planned investments funded from the grant. From 2021/22, the full grant would be used for preparation activities.  

Mr Z Mhlenzana (ANC) interjected asking if Treasury focus on the key parts of its presentation to allow Members enough time to engage with the presentation.

Ms E Peters (ANC) said this suggestion was important, however the presentation as it is, in full detail, was also very important and it was better for Treasury to give a full presentation.

The Chair said he would provide for the meeting to end at 14:30 instead of 14:00.

Mr A Shaik Eman (NFP) agreed that Treasury be given an opportunity to continue its presentation.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy, highlighted certain changes:
• BEPP Exemptions: allowed metros to be exempted from Built Environment Performance Plan requirements once planning reforms were institutionalised (changes in sections 9, 10 and 14)
• Provision for possible municipal boundary changes to regulate spending in areas affected by municipal boundary changes were included in Section 38 (these were the same provisions used in 2016)
• Improving grant administration - responsibilities for national departments which formally provide for the creation of components within a conditional grant and allow for funds to be shifted from one component to another, after consulting the receiving officer and getting approval by Treasury (Clause 17(2)) and required national departments to set a timeline for when the province/municipality must respond if they disagree with the proposed withholding of funds (Clause 18(4)(iii)) 14 Changes to Bill clauses (2 of 2)
• Improving grant administration - responsibilities for provinces and municipalities which state that provinces and municipalities must report on what remedial actions they took to address the matters that resulted in withholding or stopping of transfers (Section 12) and requirement for provinces to consult municipalities before gazetting HSDG transfers to them and to set a payment schedule (Clause 12(6)(a))
• Financial statements of provincial departments were required to include information on the amounts from conditional grant funds they transferred to municipalities or public entities (Clause 15(3)(b)) and had to allow for amendments to be made to the payment schedule between provincial departments and any municipalities, schools, hospitals or public entities, if agreed between the provincial department and the recipient (Clause 30(5)).

Ms Fanoe stated that there were changes made to the Provincial Equitable Share formula and to the provincial conditional grants for Early Childhood Development, Health Grants and the Comprehensive Agricultural Support Programme. Free basic services were provisioned R54.1 billion for the 58% of SA households with an income of less than two old age pensions per month and R5.6 billion was provisioned for institutions to assist with administrative costs. Government had also allocated nearly R1 billion per year to subsidise the cost of councillor remuneration.

Mr Steven Kenyon, Treasury Director: Local Government and Budget, summarised the changes to the Local Government conditional grants:
• Informal settlements upgrading components – these components would remain in place for 2020/21 in the Urban Settlements Development Grant and the Human Settlements Development Grant before becoming separate grants in 2021/22. Cities and provinces were required to identify which well-located settlements should be prioritised for upgrading to serviced sites.
• Municipal Infrastructure Grant (MIG) – specialised waste vehicles may be purchased through this grant (on a transversal contract, and only if expanding services)
• Additional city joins the Integrated Urban Development Grant – Steve Tshwete Local Municipality had applied to move from the MIG and met the requirements and this grant included an incentive for good maintenance and non-grant capital investment.
• Public Transport Network Grant – Buffalo City, Msunduzi and Mbombela had been suspended from the grant due to a lack of progress in rolling out services.
• Additional funds for Vaal River system rehabilitation – R750 million had been reprioritised towards Regional Bulk Infrastructure Grant projects to rehabilitate bulk sanitation infrastructure.

Dr P Groenewald (FF+) asked what ‘specialised’ meant in the context of the Municipal Infrastructure Grant (MIG). He asked for clarity on the conditions for a municipality to acquire the MIG and what preparations had been made by Treasury to facilitate the grant.

Mr A Shaik Emam (NFP) was concerned about the number of reductions Treasury had proposed. How was it planning those reductions without hindering the economic growth of the more than 200 municipalities in the country. He asked if Treasury had economic infrastructure from which the municipalities could be aided.

Mr D Joseph (DA) asked how the reduced budget of the municipalities was going to be justified by Treasury. He asked what would happen to the funds resulting from the reductions. Would those funds be channelled back to the departments or not?

Mr O Mathafa (ANC) requested clarity on the formula used by Treasury to calculate the GDP forecast of 0.9%. He highlighted that the Reserve Bank forecast was 1.2%, IMF was 0.8% and World Bank was 0.9%. He asked which formula was being used by Treasury.

On the reduced spending in the municipalities, he asked what the plan was to stimulate economic growth as this was heavily dependent on the spending of funds. Municipalities required fast economic growth for them to maintain sustainability. How would this growth come about with reduced spending?

He asked if private sector participation was included in the plan to stimulate the much needed economic growth in the municipalities. Local governments were incapacitated and thus caused suffering to the people at grass root level. He requested Treasury to submit its plan to ensure capacitation within local governments. Local and District Municipalities needed more attention as they were more disadvantaged.

Noting the funds withdrawn from Msunduzi, Mbombela and Buffalo City, Mr Mathafa asked if the impact on the quality of life of the people living there had been taken into account. For example, some of those municipalities had poor transportation systems as the infrastructure was still lacking development.  He requested answers on how those municipalities were going to be capacitated to improve the quality of life of the people living there.

Ms E Peters (ANC) stated that debt service costs accounted for 15.2% of the budget. She asked to whom exactly did the government owe that money. On the withdrawn funds from Mbombela, she asked if there was no potential for the municipality projects cost estimation to avoid the delays due to depleted project funds.

Ms Peters requested a breakdown of the 66 municipalities with unfunded budgets in 2019/20 and how much of their budget was classified as unfunded. Project planning was of concern in the municipalities and had to be improved.

She encouraged collaborative teamwork between provinces and local government structures as improving communication would ensure that local leaders improved on efficiency. It was disappointing to hear of projects that were executed by local leaders without the knowledge of the provincial leaders. For example some communities had established informal settlements and were requesting electricity from government, however the manner in which the settlement was arranged caused the settlement to be classified as ‘un-electrifiable’.

She said there were a number of social ills within communities that needed to be addressed, highlighting the major one as Gender Based Violence. On the health conditional grants, she asked what was being done to help the Northern Cape as most people experienced challenges commuting long distances to one operational hospital and did not have immediate access to health care.

Ms Peter asked how the MIG was going to help with the delivery of water to communities as it had been reported that some service providers were delivering water that was not certified for human consumption and that could impact on the health of the community.

She asked what the role of the Department of Transport for grants, stating that there was vandalism of roads in some municipalities and those roads needed to be refurbished or rebuilt. 

Mr Z Mlenzana (ANC) said he was not happy with the terminology used by Treasury in the report. The terms cast doubt on the decisions taken by Treasury and was causing government to be undermined. He asked about ‘reductions’, wanting to know if that meant there were actual cuts in the budget or were the reductions referring to redistributing the budget so that funds allocated for a project were redirected to another project.

He asked if Treasury had the capacity to ensure that all the proposed programmes could be completed within the set budget with no need for additional funding towards the end. He asked Treasury to give practical responses to the questions and not provide only generic answers. Treasury should utilise the recommendations made by the Committee. He requested that it report on which previous Committee recommendations had been acted upon.

The Chair asked if Treasury had allocated funds for support of small business to stimulate economic growth within municipalities.

Ms Ngqaleni replied that Treasury had acted upon Committee recommendations and she would provide a report on the recommendations. The recommendations had also been submitted to the departments and they would follow up on whether those had been acted upon.

On water provision, she replied that the Department of Water and Sanitation had authority for the provision of water and had to act upon that. Municipalities were responsible for capacitating its structures and ensuring that qualified personnel are recruited to aid in municipal business. Treasury had provided for the municipalities and it was up to them ensure implementation. Treasury provided support to the municipalities as some of the decisions could not be taken without capacity. Treasury was aware that it had to play a supporting role to municipalities and was aware that some of them had unfunded budgets. 

Ms Ngqaleni replied that Treasury was committed to improving efficiency and also helping with infrastructure development and this was anchored on municipality development. She highlighted that there was now a different approach with the District Development Model. There needed to be a commitment from the municipalities to capacitate themselves for dealing with the challenges they faced.

On the reductions, Ms Fanoe replied that the budget spanned over three years and the reductions meant that the 2021 budget would reflect less funds in the same area compared to its 2020 counterpart – that was the manner in which the ‘reductions’ were defined.

She replied that Treasury used its own formula to calculate the GDP forecast and it only came as a coincidence that its forecast matched that of the World Bank.

She replied that if a municipality has an unfunded budget, it meant that its own revenue would have to be used to fund its budget for the coming year.

On the debt service costs, she replied that the government was spending more than what it was provisioned and the only way to recover from that was to adjust the expenditure and ensure an increase in revenue.

Mr Kenyon replied that the specific numbers requested by Members would be provided the next morning.

The Chair thanked the Treasury team for the information. The Committee and Treasury would meet the next morning for the public hearing on the Bill.

The meeting was adjourned.

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