Division of Revenue Bill: National Treasury, FFC & PBO briefings

Meeting report

The Chairperson acknowledged those Members who were struggling to join the virtual meeting due to technical issues. There was an apology from Mr Mkiva who was struggling with poor network in a rural area in the Eastern Cape. This was a challenging year for the country and world. She encouraged Members to put their political interests aside and start engaging with the aim of advancing the interests of poor and vulnerable South Africans, as well as those at the forefront of the fight against the COVID-19 pandemic. She welcomed the interventions announced by the President the previous night.

Division of Revenue Bill [B3-2020]: briefing by National Treasury
Ms Malijeng Ngqalani, Deputy Director General: Intergovernmental Relations, provided a summary of the DoRB and Chapter 6 and Annexures of the Budget Review, which were tabled in February. This was prior to the outbreak of COVID-19 and the downgrade of the economy, which had a severe impact on economic growth and fiscal outlook. The Minister of Finance is currently in discussion with the National Assembly Speaker and National Council of Provinces (NCOP) Chairperson on the options for an adjusted 2020/21 budget that responds to COVID-19 and takes into account the measures announced by the President last night. One of the options is to fast track the current budget in order for funds to be released and then enable a special budget. The time it takes to pass the DoRB and Budget is crucial.

Prior to the pandemic and national lockdown, South Africa already faced a tough economic climate, such as low economic growth and deteriorating public finances. The 2020 Budget responded to this through reductions to baselines of R261 billion and reallocations of R111.1 billion, of which R60.1 billion went towards supporting Eskom and South African Airways (SAA) and the remainder for critical spending priorities. The Budget was cut in such a way as to protect health and basic education. The major reductions were in conditional grants. Provincial and local government allocations grew above inflation. Debt service costs outpace all other categories of spending. Transfers to state-owned entities (SOEs) resulted in a higher share for national government.

The transfers to fund operational costs of social services in provinces and free basic services in municipalities have been protected in real per capita terms. This reflects an effort to protect provinces and local government under difficult conditions. Conditional grant funds maintained the same level of allocations for the past decade. Larger reductions were made to grants to urban municipalities, which have more capacity to offset the effect of cuts by increasing their own revenue investments.

The DoRB allocates funds raised mainly from an urban tax base to be spent on services across the country, making it highly redistributive. In response to the Committee’s recommendation for consequence management and addressing unfunded budgets, National Treasury and provincial treasuries requested municipalities to provide revised 2019/20 budgets. In response to the Committee’s recommendation for developing a pipeline of investment-ready projects in metros, cities will be able to use at least half of their Integrated City Development Grant allocations for programme and project preparation activities. To be eligible, metros will need to submit a letter to National Treasury indicating their commitment to establishing and institutionalising an effective system of programme and project preparation. Additionally, metros must not have had an adverse or disclaimed audit opinion in the last two financial years and must have formally adopted council resolutions.

Changes to clauses
Mr Steven Kenyon, National Treasury Director: Local Government Budget, said the clauses of the Bill remain relatively the same. Minor changes include allowing metropolitan municipalities to be exempted from Built Environment Performance Plan requirements once planning reforms are institutionalised. There is a provision for possible municipal boundary changes, which is unlikely to happen in this financial year. Lastly, there are changes to improve grant administration such as formalising requirements for conditional grants. In response to the Committee’s recommendation to support the District Development Model, the changes require provinces and municipalities to report on remedial actions taken to address the matters that resulted in the withholding of transfers. It requires provinces to consult municipalities before gazetting transfers and set a payment schedule. It also requires departments to include information on the amounts from conditional grant funds that it transferred to municipalities or public entities. The changes allow for amendments to be made to the payment schedule between provincial departments and any municipality.

Changes to provincial government allocations
The data used in the Provincial Equitable Share Formula has been updated and includes reprioritised funds for sanitary dignity, gender based violence support and social worker support. 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 largest addition to the provincial conditional grants is the R1.4 billion added to the Early Childhood Development Grant to improve the per child per day subsidy from R15 in 2019/20 to R18.57 by 2022/23, and a small expansion of services. On the Committee’s recommendation for implementation of changes to health grants, development components are added to two conditional grants: National Tertiary Services Grant and Statutory Human Resources, Training and Development Grant. This is to promote improvement in health services in rural provinces. A new quality improvement activity is included in the National Health Insurance (NHI) Indirect Grant. National Treasury will work with the Department of Health to review the health grants system – however this has not started given the focus on immediate needs in the pandemic. The total value of provincial conditional grants increase from R107 billion in 2019/20 to R123 billion in 2022/23.

Changes to local government allocations
Government currently funds 10.4 million poor households in 2020/21. Updates to the Local Government Equitable Formula increases funds to 10.8 million in 2022/23. On the Committee’s recommendation for institutions to face consequences, there are changes to local government conditional grants. Three municipalities have been suspended from the Public Transport Network Grant due to lack of progress in rolling out services. R750 million has been reprioritised towards Regional Bulk Infrastructure Grant projects to rehabilitate bulk sanitation infrastructure. Local government conditional grants increase from R52.1 billion in 2019/20 to R56.3 billion in 2022/23.

Treasury response to the Appropriations Committees and FFC recommendations
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, provided a summary of Treasury’s responses to the Standing and Select Committees on Appropriations and FFC recommendations. Treasury agrees with the Committee’s recommendation to prevent wasteful expenditure, and will monitor transfer fund spending and provide regular reports. The roll-overs have been approved and the funds are available to be spent. A progress report will be provided to Parliament. The spending patterns of the grant for school sanitation backlogs have improved. On the Committee’s appeal to National Treasury, it continues to work with the Department of Cooperative Governance (CoGTA) and South African Local Government Association (SALGA) to support municipalities. The revised municipal budgets, described in Chapter 6 of the Budget Review, take account of the need to make payments to Eskom and water boards. On the development of the Moloto Rail Corridor, SANRAL is allocated R4.2 billion to upgrade these roads between 2019/20 and 2022/23. A lot has been done to improve road capacity and safety through infrastructure upgrades. Human settlement and economic development options for this region also need to be considered, however the whole option is not affordable. The Minister of Finance has proposed holding a special Local Government Budget Forum lekgotla to discuss the structure of the local government fiscal framework, including the size and structure of transfers

On the reforms to the health grants, the National Department of Health and National Treasury will work together to develop a broader strategy that will inform future changes to health grants that are predictable and align to NHI reforms. Treasury responded to the FFC recommendations on the division of revenue (DoR) as provided in part 3 of Annexure W1 of the Budget Review. Chapter 6 elaborates on the strategy towards unfunded budgets. National Treasury has proposed collaborating with SALGA and COGTA to produce papers and presentations for the Local Government Budget Forum lekgotla in 2020. COGTA is coordinating the implementation of the pilots of the District Development Model. Treasury will support COGTA and report on this. The effectiveness of the capacity-building system for local government is also being reviewed by National Treasury.

How Division of Revenue Bill is responding to COVID-19 disaster
• The 2019 Division of Revenue Act has several disaster provisions that have already been activated:
• Disaster Relief Grants to the value of R466 million were released on 26 March and transferred to provincial health departments for the purchase of personal protective equipment.
• Reallocations in terms of section 20(6), which allows exiting grants to be reallocated for disaster alleviation:
• R306 million in the indirect Regional Bulk Infrastructure Grant was reallocated for interim water supply measures (tanks and tankering)
• 2019/20 Urban Settlements Development Grant funds not already contractually committed to projects have been reallocated to allow cities to fund increased services in informal settlements and vulnerable communities
• Adjustments to conditional grant business plans: an estimated R1.4 billion in 2019/20 Municipal Infrastructure Grant funds are being redirected to urgent water supply projects
• Enacting the 2020 Division of Revenue Act will enable the use of similar provisions in 2020/21 to provide further assistance
• National Treasury is proposing to make small changes to a few conditional grant frameworks before they are gazetted to better respond to the scale of this unprecedented situation

Once the DoRB is enacted, the DoRB clauses and schedules approved by the Committee become the Division of Revenue Act. Annexure W1 then falls away. She requested the Committee recommend to give approval for Treasury to make small changes to grant frameworks to accommodate spending on additional activities to assist in the COVID-19 response.

Financial and Fiscal Commission (FFC) submission
Prof Daniel Plaatjies, FFC Chairperson, said the GDP growth of the country has worsened since February due to COVID-19. On the implications for special adjustment, the FFC makes the case for the following:
• Adjustments cannot be carried by South Africans at the bottom of the income distribution
• There needs to be careful consideration of the impact and care for communities.
• The focus cannot be only on risks of global shifts and the need to consolidate, but also on opportunities for technological change and South African strengths.
• There is a need to look at the reorganisation and capacitation of the state at all three levels.

To develop a capable and efficient state, there is a need to look at factors behind policy uncertainty rooted in conflict of interest, inequality, and weak implementation. There is also the blocking of change by those who think they stand to lose. These conflicts must be purposefully dealt with to work toward cohesion.

Mr John Kruger, FFC Head of Research, said the FFC supports technical changes and clauses for flexibility and accountability. Learning and culture take up the biggest part of the budget, followed by Health and Social Development. Debt service costs are the fastest growing item. There is a shift from ‘social sector’ to a focus on economic development, community development, social development. Government is trying to reduce compensation spending and move more towards capital expenditure. National departments will receive R757.7 billion, provinces R649.3 billion and local government R132.,5 billion. In the DoR, the share of provinces and local government slightly increase, and national slightly decreases. According to government proposals, national spending in real terms will become negative. Local and provincial government spending will slightly increase in real terms. There was an addition to the baselines of national conditional grants, and a reduction to the those of provinces and local government.

Prof Plaatjies explained the differences between the 2020 Budget and 2019 Budget for each province. The general narrative for the provinces in the equitable share is an addition for the sanitary dignity programme and employing social workers in areas with high gender based violence, substance abuse and social problems affecting children. On the reductions to provincial conditional grants, he gave the example of funds from the direct agriculture conditional grant shifted to fund the National Food and Nutrition Survey. He highlighted the implications of COVID-19 on the budget (see document).

Dr Mkhululi Ncube, FFC Project Manager: Local Government Unit, explained the provincial grant analysis changes. The FFC is concerned with the baseline reductions to the Education Infrastructure grants. It supports the R544 million ring-fenced within the Human Settlements grants to upgrade settlements in mining towns. It welcomes the additional funds to the Early Childhood Development (ECD) grant. It also welcomes the shift of R199 million for 2020/21 and R5.7 million from the NHI Indirect Health Facility Revitalisation (HFR) Grant to the direct grant for building of hospital projects.

Dr Ncube spoke about the implications of the COVID-19 pandemic on the DoR. To deal with additional expenditure needs (health, essential services and supporting households, workers and firms) expenditure will have to increase while revenue declines, therefore, the deficit and debt will have to increase.

FFC supports the overall thrust of the Budget and DoRB but raises issues about whether society could not arrive at a mechanism for effecting stabilisation that is more fair and less polarising, than through wage restraint for workers we rely on to secure our future: teachers, nurses, police, prosecutors, social workers.

While tax increases were not considered in the February budget to help balance the books, COVID-19 has strongly highlighted the inequality in our society and prompted proposals around a solidarity tax. A more general strategy around incomes, prices and access to social services might also be necessary. The complexity and comprehensiveness of the initiatives around the structural changes in the economy point to the need for a more focused approach that has credibility and can be implemented

The FFC recommends the Committee approve the DoRB and consider that the emergency interventions and measures may have implications for the fiscal position of national, provincial and local government public spending and revenues.

Parliamentary Budget Office (BPO) briefing
Dr Dumisani Jantjies, Deputy Director: Finance, said the purpose of the brief was to assist Committee members in their consideration of the 2020 DoRB and in determining the consistency of the changes to the DoR with the fiscal framework. COVID-19 highlights the public health dangers associated with the current and inadequate quality of basic services. The 2020 DoR allocations have changed compared to the 2019 DoR, mainly due to unforeseen expenditure pressures from State Owned Companies (SOCs) and slower than expected economic growth. The potential implications of the changes in service delivery allocations are unclear at this stage. He suggested the Committee consider requesting government to:
• Provide regular updates on the impact of reducing the conditional grants on service delivery.
• Report on the service delivery impact of the baseline reductions in the infrastructure and capacity building conditional grants.

PBO’s assessment of the grant schedules finds that the performance information provided by the conditional grant frameworks is insufficient to determine its efficiency and effectiveness.

On the basic service delivery backlogs, South African households have gained improved access to basic services over the past decade. Government still has much more to do as there are more households to provide with basic services, and the quality of access to these basic services should improve.

Ms Nelia Orlandi highlighted the changes in the 2020 DoR for national, provinces and local government. On the effective and efficient spending of the conditional grants, the PBO began a series of assessments of the grant schedules and found that the performance indicators:
• Provide information on outputs achieved
• Do not provide impact indicators, which makes it difficult to determine effectiveness of funds spent
• There is a two year gap in the schedules information received by the PBO.
• Targets over the medium term are not provided.

In conclusion, she said that it is important for Parliament to receive more regular updates on financial information, not just on spending.

Discussion
Mr A Motswana (ANC, North West Legislature) asked if National Treasury could clarify the drought relief money. He asked how the Committee will ensure funded mandates are spent in a way that addresses the needs of people on the ground.

Mr R Mackenzie (DA, Western Cape Legislature) asked if Treasury, FFC and PBO have discussed the changes to the 2020 Budget given the announcements made last night and over the past few weeks. When is the Minister of Finance going to table the new emergency budget, so the new changes can be put into effect immediately?

Ms Ngqaleni replied that the decisions on spending changes under this emergency is still going on between the Minister, the NCOP Chairperson and the Speaker.

Mr Kenyon said that Treasury is engagingly extensively with departments and local municipalities and it will give a detailed presentation on the outcome of the discussions soon.

Ms F Rhoda (DA, Northern Cape Legislature) said that the Northern Cape faces a fiscal crisis that has hindered its ability to respond to the triple threat crisis of the COVID-19 pandemic, its ongoing drought and the sovereign credit rating downgrade. The downgrade triggered an outflow of capital and will compromise South Africa’s ability to form mutual and beneficial partnerships in future projects. The country and province will be left vulnerable to the international finance loan sharks. The Committee needs to plan an aggressive mitigation against that.

Ms Rhoda noted the Land Bank’s R20 billion default announcement on 20 April is concerning because 25% of agriculture debt is carried by Land Bank. Due to the drought, debt in the agricultural industry is likely to increase. The province's agriculture could be crippled beyond repair as a result.

On the triple threat crisis, there is a lack of planning for the social impact and on mental health. There is bereavement from job and revenue losses. Slide 25 in the Treasury presentation indicates that it will look into it. However, it needs to be planned for now.

What kind of efficiency measures does Treasury refer to in its presentation? How do these proposed measures differ from those already in the law? Since there is no improvement in consequence management, what support should provincial government expect from National Treasury over and above what has already been implemented?

Ms Ngqaleni replied that she disagreed with the opinion that mental health is being neglected. The response to COVID-19 does not neglect this as there are no health cuts and health is being prioritised, so the programmes currently in place will continue and should be adequate. The Land Bank default is a problem and the challenge is still unfolding and so it is difficult to effectively respond to this question at the moment.

Prof Plaatjies replied that the Land Bank default has a knock-on effect on the debt guarantee challenges faced by commercial and emerging farmers. On efficiency measures, it is the responsibility of the Committee to ask those questions to the relevant departments on potential areas for efficient management.

On the drought relief funding, Mr Kenyon replied that previous allocations to the North West totalled R340 million, which was mostly through indirect grants managed by the Department of Water and Sanitation for water infrastructure. Treasury is aware that there were roll over problems that took place in that process. National Disaster Management is currently processing applications from the provincial disaster relief grant on COVID-19 and the drought. Once Treasury receives an update on the timeline of when funds will be released, it will inform Parliament.

Mr D Ryder (DA, Gauteng) requested Treasury and the FFC’s opinions on whether the Committee should go ahead and approve the current DoRB as a matter of formality so that money can be released, or should it go back and redo DoRB and deal with the emergency budget?

Ms Ngqaleni replied that one of the options now is to approve the Bill, which will enable Treasury to table Special Appropriations or immediately table a Special Budget. The procedure needs to happen at a faster pace than usual. If the Bill is not processed, there will be a gap and departments will not be able to spend.

Ms N Nkondlo (ANC, Western Cape Legislature) agreed with the FFC and PBO presentations on the economic woes faced by the country prior to COVID -19. It is important to consider capability when considering changes that need to be made. How does Treasury reconcile the allocation changes with the socio-economic realities in the local municipalities?

Does the triple threat mentioned earlier rest with National Treasury? What provision is being made to support that? When will a conclusion be reached on gender budgeting, seeing as women are mainly affected by COVID-19? How are the municipalities that were experiencing liquidity risk dealt with, with the current COVID-19 financial pressures? A balance must also be struck between a social spending response and an economic response, especially in municipalities with high levels of poverty.

On the logic of cutting allocations to the metros given the major needs on the ground, Ms Ngqaleni replied that the reasons are Treasury needed to get the money from somewhere. There has been poor performance in the metros and the metros have potential for more efficient use of resources

Prof Plaatjies replied that gender budgeting requires Parliament to hold departments accountable and identify who the majority of spending is on and identify who are the vulnerable and at risk.

Mr F Du Toit (FF+, North West) said that the current DoR does not make sense with the projected negative growth of 5.8% to 6.1%. It will result in a huge budget deficit. If the Committee accepts the current DoRB as it is and government sources funding from loans, what will the budget deficit then be? The blocking and unblocking of areas proposed by Minister Sisulu places an extra burden on municipalities. The drought is a country-wide problem and food security must be ensured.

Mr S Nkosi (ANC, KwaZulu-Natal Legislature) pointed to the poor performance of indirect grants which need to be done away with unless there is a plan to monitor them effectively. He raised his concern that three KZN departments have not been allocated the Expanded Public Works Programme (EPWP) Integrated Grants for provinces amounting to R25 million. Why is there zero allocation in the EPWP Grant for the KZN Department of Health and Department of Sports, Recreation and Arts and Culture?

Mr Kenyon replied that the EPWP grant is an incentive-based grant based on provincial past performance. If a department underperforms in a particular year, it will not qualify for allocation in the subsequent year. Provincial government should then engage with those departments on their past performance.

The Chairperson commented that it is also the responsibility of the NCOP permanent members of that province to work jointly with the KZN Provincial Legislature on the concerns raised by Mr Nkosi.

Mr Joe Mpisi (ANC, Gauteng Legislature) said he disagreed with doing away with indirect grants as it depends on the provinces themselves. He asked about the implications of the R500 billion announcement made by the President last night. Which programmes is this money going to come from so that provinces can prepare? COVID-19 is going to affect local government more; therefore, Treasury should prioritise increasing revenue to local government. It should also prioritise increasing revenue to the Department of Health.

Mr Y Cam (ANC, KwaZulu-Natal) said the Committee has to adopt the current DoRB so that we can immediately amend the 2020 Budget.

Mr J Skosana (ANC, Mpumalanga Legislature) raised concerns about the following projects that seem to no longer be on the agenda of national and provincial government: Bushbuckridge water project, Maputo Corridor project and the Moloto Rail project. Are there any means for funding these projects?

The Chairperson announced that written submissions can be made to the secretariat of the Committee.

Mr Mackenzie asked where Treasury will get the R5 billion for the deployment of extra soldiers? Will it cone from the R500 billion rescue package or the current budget. Given the tight timelines, will procurement be centralised to avoid corruption and food not getting to individuals? Will the R20 billion announced for municipalities be direct grants and what criteria are attached? Are they conditional? Funds that were suspended to the likes of Buffalo City Municipality, will this now be relooked at? On the funds for the sanitary dignity project – assuming schools are closed – will this money be reallocated? Will there be consideration for sanitary products to be made available for the girl child to collect at schools or NGOs? Treasury could email the feedback to the Committee.

Ms Ngqaleni replied that Treasury is currently in the process of looking at this. There are non-urgent and non-priority programmes, such as travel and catering. It will also look at what programmes can be postponed in infrastructure development to fund the emergency response.

The Chairperson stated that the focus of the meeting is on the Division of Revenue Bill as connected to the February budget. She proposed that the Committee stick to the amendments proposed by Treasury. She asked Treasury to clarify if the Committee will be dealing with a Special Appropriations Bill for the COVID-19 allocations. On Moloto Rail as mentioned in Treasury’s presentation, there is no real expansion or improvement. Perhaps the wrong department is being engaged, and so the Committee will take that forward with the Transport Department. Perhaps money has been wasted as this project began in 2008.

Ms Ngqaleni replied about Moloto Rail that the Minister made it clear that the decision of government was to go for the Moloto Road. There will be a huge upgrading of the road beyond what it is now. On informal settlements upgrading, there is a process being conceptualised now on how to capitalise the capital in the informal settlement upgrading. It relies on forming a strong partnership between civil society and government.

Ms Fanoe replied that the President announced that R20 billion would be allocated for COVID-19 response measures. The concern with the health budget is acknowledged and it will be increased substantially to deal with COVID related issues. The source of funding for the additional allocation to the Defence/Security cluster will be detailed in the amended fiscal framework and DoR.

Prof Plaatjies replied that FFC recommends the approval of the DoRB as it stands because:
- it will allow spending within subnational government
- it will enable section 16 and 25 of the PFMA – which allows for national and provincial emergency spending.

Dr Jantjies replied that the PBO does not have an addition to the responses given, and it acknowledges the uncertainties mentioned. It looks forward to providing input on the amendments and revised changes.

Mr M Moletsane (EFF, Free State) commented that he hopes Treasury will consider the request for increasing resources to the Department of Health.

Mr Mpisi mentioned two concerns about the infrastructure grant for education. The Committee is aware that schools are being burnt down lately. How will Treasury assist provinces to deal with this. In Gauteng alone, 72 schools have been damaged.
 
Mr Kenyon replied that Treasury will look at how that can be addressed in the infrastructure grant and coordinate with the Department of Basic Education. On the emergency procurements, Parliament will be briefed by the Acting Chief Procurement Officer.

Resolution
The Committee Secretary formally announced the resolution: The Committee accepts the Bill as tabled and will consider, process and adopt it in its current form. In consultation with provinces, it will make recommendations in its report.

Ms Fanoe requested to add the following to the resolution: The Committee agrees to the conditional grant framework for provinces and local government to allow for COVID-19 expenditure.

Mr Y Carrim (ANC, KZN) moved for the amended resolution. Mr E Njadu (ANC, Western Cape) seconded the move.

The Chairperson noted the FF+, DA and EFF reserved their vote for the time being due to the addition to the resolution by Treasury.

The Chairperson announced that the provinces will have their own meetings to discuss and conclude their mandate to be sent to this Committee. Due to last night’s announcement, the schedule will be fast tracked.

In closing, the Chairperson thanked all Committee members, the provincial members for availing themselves, and thanked the stakeholders for a successful engagement.

The meeting was adjourned.