The Committee was briefed by the South African Local Government Association (SALGA) and the Congress of South African Trade Unions (COSATU) on the Division of Revenue Bill (DoRB). The SALGA delegation said that the Covid-19 pandemic had exposed the flaws of the funding model of local government and its ability to swiftly respond to disasters. The 2020 DoRB perpetuated the continuation of financial incapacitation of local government (LG) that SALGA has decried for years.
The current Local Government Equitable Share (LGES) Formula was based on a loose assumption of costs of providing services at a horizontal level, which affected the vertical distribution to such an extent that LG was completely underfunded for mainly basic services but also other components. This was because the costing methodology did not support differentiated circumstances faced by each municipality. The outbreak of COVID-19 was expected to dramatically increase the number of poor households, with some research forecasting unemployment levels of up to between 50 and 60%. This would, in turn, impact the revenue collection abilities of municipalities. Metropolitans saw a 30% decrease in monthly revenue and the 5% drop in payment rates collected by municipalities would cost an estimated R14 billion. Therefore, the revision of existing powers and functions was imperative to create an ideal municipal functionality model.
Transfers for assigned functions should not be dependent on the Minister’s discretion but be directly transferred to municipalities. The Municipal Disaster Relief Fund of R354 million was insufficient and SALGA requested that this be reviewed. It proposed the application of a hybrid model to ensure LG responded to the crisis with the agility that was needed, as the current processes were inflexible. SALGA called municipalities to suspend the disconnection of water and electricity for the duration of the period of the lockdown as it worked against efforts to flatten the curve. SALGA concluded its presentation with short- and medium-term recommendations related to the DoRB.
Members of the Committee agreed with most of the recommendations made by SALGA. However, they raised concerns about the capacity of LG to spend funds effectively. The possibility of funds being mismanaged under the current circumstances was high and so Members did not agree with the exemption of municipalities from the Municipal Finance Management Act (MFMA).
Members also raised concerns about the disaster management issue being one of district competency. They asked how SALGA envisioned the funding gap created by COVID-19 being covered. The LGES Formula should take into account the historical performance of municipalities; debt-recovery strategies be considered and a rural grant be considered.
Members raised concerns about government fulfilling the terms of the three-year agreement under the current conditions, as well as on the request for increased health inspectors. They agreed with most of the proposals and requested that a clearer set of priorities accompany the long list of demands.
The Committee Secretary presented a summary of the written submissions from the public. The Committee acknowledged inputs from the public and agreed to note the submissions in its report, so it could comment on each of the inputs. It also requested National Treasury to submit comments on the written submissions.
The Committee adopted the meeting minutes of its last several meetings
The Chairperson welcomed all stakeholders in attendance. She explained that the Committee was meeting with South African Local Government Association (SALGA) in accordance with the process prescribed in section 214, subsection two, of the South African Constitution. Provinces would be sending their final mandates in the coming weeks. Written submissions from the public were circulated to Members for consideration in accordance with section 72, subsection one.
The Committee Secretary noted an apology from Mr M Moletsane (EFF, Free State).
Briefing by the South African Local Government Association
Mr Bongani Baloyi, National Executive Committee (NEC) Member, SALGA, said COVID-19 had added a huge burden on municipalities, with the increased demand in services as residents were mostly at home and industries were shutting down.
Ms Khomotso Letsatsi, SALGA’s Chief Officer: Municipal Finance, Fiscal Policy and Economic Growth, said COVID-19 drastically changed the operational landscape of local government. The pandemic further exposed the flaws of the funding model of local government and its ability to swiftly respond to disasters. It exacerbated the backlog municipalities had faced over the previous 20 years and continued to place an unaffordable burden on ratepayers. Although local government (LG) was responsible for 46% of the constitutional functions, it received the lowest allocation of the national expenditure allocation, at 9%. This indicated a misalignment in terms of LG’s responsibility and the allocation. The financial state across local government did not look good, with municipalities struggling to collect revenue. Metropolitans had seen a 30% decrease in monthly revenue due to the pandemic. The underfunding in basic services necessitated a revision of the LGES Formula, as it was based on a very loose assumption of costs of providing services at a horizontal level. In many instances, the cost of providing basic services exceeded the equitable share because the costing methodology did not support differentiated circumstances faced by each municipality. The one-size-fits-all approach did not work as the 243 municipalities were diverse in their abilities to raise revenue. She elaborated on SALGA’s key costing model features.
She expanded on the White Paper assumptions that were in disequilibrium with the municipal mandates and challenges on the ground. For one, the conditional grant system was both ineffective and costly. It was worsened by the influence of the current state of the economy. The outbreak of COVID-19 would dramatically increase the number of poor households. The influence of ESKOM’s role in the electricity distribution industry on municipality revenue should not be underestimated. LG bore significant costs for the delivery of unfunded and underfunded mandates. Municipalities performed functions on behalf of provinces without assigning full expenditure to the functions. Additionally, some allocations from the province were not transferred on time according to the agreed payment schedule. SALGA requested that financial instruments be transferred directly to municipalities instead of through provincial government.
Ms Letsatsi said municipalities were never ready for a crisis like the COVID-19 pandemic, which was shown by how insufficient the Municipal Disaster Relief Fund of R354 million was. The inflexible processes that prevented local government from responding to the crisis with the warranted efficiency needed to be reviewed. The directives of the DMA placed a huge financial burden on municipalities under the current conditions. For instance, the more frequent levels of service during the lockdown increased allocation pressures on municipalities. The pandemic had an impact on the financial sustainability of local government, decreasing its revenue. The economy was forecasted to contract by 2.5% and the 5% drop in payment rates collected by municipalities would cost an estimated R14 billion.
Eskom was still doing business as usual during the COVID-19 lockdown and continued to send disconnection warnings, even though the demand for electricity was high during the lockdown, and the disposable income of households was negatively affected. SALGA recommended that the disconnection of electricity and interruption of water consumption by defaulting households should be suspended because it would only worsen the current pandemic-induced crisis. She outlined SALGA’s short-term and medium-term recommendations related to the DoRB and addressing the impact of COVID-19.
Mr D Ryder (DA, Gauteng) agreed that the relief amount was inadequate and must be reviewed. Even though that was the case, throwing good money into bad municipalities was not desirable. The LGES Formula needed to take into account the historical performance of municipalities. Disclaimers should get a base value. Good performance, such as unqualified audits and putting effort in non-revenue water, should be rewarded. He noted that the impact of COVID-19 was massive and collection must have dropped during the lockdown, with the closure of businesses and people not earning salaries. How does SALGA see the need for funding, henceforth? Would it like a bigger allocation to the LGES and conditional grants to cover the funding gap created by COVID-19?
Mr Ryder raised concerns to National Treasury (NT) on the business submissions and apparently faulty allocations. He asked if more allocations were coming and if so, when. How are business submissions evaluated and what criteria are used for allocation?
He raised a concerned with the disaster management issue being one of district competency, especially given that the new district model potentially seeing increased reliance on districts. How have the district allocations been rolled out?
Mr Baloyi said Mr Ryder’s suggestion needed to consider the punitive measures to communities directly, not just to management. There needed to be a better way that ensured that those communities who needed the most help received it. Industries were the biggest users of electricity; thus industry contributions were used to cross-subsidised households. The R20 billion needed to reflect more on issues of trading services to deal with the operational costs of municipalities. The LGES needed to be reflective of the cost of services. SALGA requested that in the allocation of disaster relief funds, municipalities with the most diminished revenue be prioritised first. There were savings in the USDG grant of about R4 billion. That amount should be used to augment the disaster relief allocations.
Ms Letsatsi said the President was specific about how the R20 billion should be allocated - namely, towards shelters for homeless people, sanitation and food parcels. It would not go towards covering municipal revenue shortfalls. These funds would not be released before June.
Mr Steven Kenyon, National Treasury Director: Local Government Budget, said that making the LGES performance linked treads on the bounds of constitutionality, as section 214 limited what could be included in the equitable-share formula. However, the conditional grants could and had a performance component.
He explained why the municipal disaster relief was only R350 million. Disaster funding was not an easy thing to prepare for – especially a disaster of this scale. Setting aside a huge amount such as R20bn for disaster funding each year would not be ideal. The planned amount was based on the fact that the disaster relief grant was normally used for flooding in one or two municipalities or a drought. Treasury acknowledged that disaster management was not ideal. Annexure six of W1 of the Bill stated that one of Treasury’s reforms was to work with the national Disaster Management Centre to review the disaster funding regime.
Mr Ryder stated that section 214 of the Constitution potentially allowed linking equitable share to performance. Particularly, paragraph 214 (2)(h), spoke of the “obligations of the provinces and municipalities in terms of national legislation;”. This, read in conjunction with paragraphs 216(2), 411(c) and 152(1)(a), could create a strong arguments for linking the share to performance. He said that this would be emailed to Mr Kenyon.
Mr S Du Toit (FF+, North West) said the Committee and presenters should keep in mind that Minister Sisulu had said that blocking and unblocking would occur, and so the burden on municipalities would become larger. At this stage, municipalities could spend 75% of the grants. He stated that he feared overspending would take place because of this. The problem with paying directly to municipality was that many of them were under administration with questionable budgets. This raised concerns that the money may not go where it was needed. Even though the need had always been there and municipalities had not been performing over the last 26 years, the possibility of funds being mismanaged under the current circumstances was high.
Mr Baloyi responded that the Minister’s announcement posed a few challenges to municipalities. The usual process around such issues was led by municipalities. However, it was now led by the Department of Water and Sanitation. Re-densifying and blocking made it impossible to recover. The fiscus of the municipalities would be severely affected. On the issue of capacity and corruption, SALGA would like to call on a partnership with all political parties involved to condemn these issues. The partnership needed to prevent criminals from coming in the local government sphere in the first place. The direct control was not from SALGA but from the political parties themselves.
Mr Kenyon said SALGA’s submission talks to the assignment and delegation of functions were different. SALGA mostly referred to unfunded mandates, which referred to cases in which a province signed a service-level agreement (SLA) with municipalities, which contained a payment-level agreement. A new clause was added to last year’s DoRA, requiring provincial treasuries to make sure budgets were adequate to cover the terms of the payment agreements. NT was yet to hear from SALGA on whether municipalities were using the increased bargaining power. SALGA’s suggestion to pay municipalities directly violated the principle of funds following function, where the function has not been legally assigned to municipalities. The funding could not follow another sphere due to an SLA where the function was delegated.
Mr E Njadu (ANC, Western Cape) asked if SALGA considered the capacity of municipality to manage the recommended funds. Has it considered past auditing outcomes, the history of unspent funds and risk plans? What is SALGA’s view on the unequal allocation in national and local government?
Ms Letsatsi indicated that SALGA had made a submission to CoGTA and NT on how the disaster relief fund was insufficient and did not reflect the demands on the ground. The sector had been allowed to redirect the grants to respond to demands on the ground. SALGA’s submission included a proposal with the original equitable share amount added with the redistribution factor, which considered the financial standing of municipalities.
Mr Y Carrim (ANC, KwaZulu-Natal) asked how Treasury was allocating further funding based on the specific incidences of COVID-19 in municipalities. He reckoned that the presentation mainly focused on structural and long-term issues. What are SALGA’s views or strategies on the immediate issues?
Mr Kenyon stated that the NT could not speak on future allocations before the allocations were made. The final allocations had not been made as yet. Regarding the two disaster relief grants that had been made so far; the grants did not factor in the burden of disease across municipalities due to the need across the spectrum and the fast rate at which the incidence changed. This could be factored-in in the near future.
Ms Letsatsi said SALGA had made a request to the spheres of government that the funds due to municipalities be paid and within the required time period. If this did not happen, it increased the risk of municipalities closing. Another submission was made to avail the R20bn to ease cashflow pressures and assist with covering expenses.
Mr Kenyon explained that the reason for the limited size of allocation for the municipal relief grant was that at the moment, there was no legal budget for 2020 yet. This was because the DoRB for this new financial year had not been enacted. Therefore, NT was currently working from the 2019 Provision of Revenue Act, which allowed for the expenditure of 45% of the 2019 municipal disaster relief allocation, which was R151 million. This maximum amount had been fully allocated and translated into the small allocations to the many municipalities. The 2020 budget needed to be passed as swiftly as possible so that the amendment Bill could be introduced.
Mr Kenyon said that almost all the numbers on slide 16 of SALGA’s presentation were incorrect or out of date. Treasury had provided more than R5bn worth of relief funding to municipalities within the last three months.
The Chairperson asked SALGA the following:
-How much should the allocation be, instead of the 9%?
-Why can the debts from municipalities not be recovered?
-Are there no debt-recovery strategies?
-Is local government planning on writing-off the debts?
-Has any work been done to address the unfunded and underfunded mandates of LG?
She noted that SALGA asserted that its model of MIG was not considered. What does this mean and what was the reason for it not being considered? She agreed with most of the recommendations, except the exemption of municipalities from the MFMA, as it would enable floods of corruption and the looting of state resources. Instead, further measures should be put in place to strengthen financial control. Has there been adequate planning in LG for the R20bn?
Mr Baloyi said that SALGA had considered the capacity of municipalities and the issue of funds not being spent. However, the burden on municipalities had increased significantly with more directives being given to municipalities. This led to more costs being incurred. The 9% was not cost-reflective of services being delivered, which needed to be built into the formula. The exact percentage needed scientific basis. However, as a point of departure, the allocation must be cost-reflective. The 59% municipal debt was not recoverable because of historic debt, the unemployment situation in the country and more households not affording to cover their municipal debt. The MFMA exemption dealt with the process of tabling the draft budget, engaging with the public on it and its finalisation. The MFMA was specific on when the budget procedure must be done and how. COVID-19 interrupted all of this by barring of council meetings, amongst other things. The exemption only alluded to the budget adoption procedure in the MFMA.
Regarding the concerns with the 9% allocation, Mr Kenyon said that it was difficult to drastically change allocations between the spheres. It would require finding something that was overfunded at the provincial and national level. The last drastic share change was between 2000 and 2010, where the share of local government increased from 3% to 9%. This happened because of economic growth that generated rapid revenue, enabling a share increase.
Mr Z Mkiva (ANC, Eastern Cape) asked if SALGA considered the nature of rural municipalities. He said people in rural communities had to travel far to access services, such as ATMs. In addition to facing high transport costs, this also posed a problem of overcrowding in towns. He asked if a rural grant could not be distributed to assist rural residents with gaining access to services that were concentrated in towns.
Mr Baloyi said government needed to appreciate the challenges faced by rural municipalities. SALGA understood that responding to this, under the current circumstances, would be difficult.
Mr Kenyon agreed that rural transport needed to be funded. There was a transport funding subsidy policy being discussed with the Department of Transport. Rural transport issues were part of that package.
Mr Carrim recounted that in the past, Members had agreed with NT that LG had not effectively used funds and did not have the capacity to use it productively. Is NT able to assist those municipalities that need to address these challenges but do not have the capacity to do so?
Mr Baloyi agreed that the presentation dealt with a lot of structural issues. However, the latter part highlighted the short- and medium-term interventions.
Mr Kenyon responded that a time of disaster was not a time to start new things and hire new people. One had to respond with the measures and tools in place. Also, the travel restrictions and precautionary measures made it difficult to deploy new employees for capacity improvement. However, there was an ongoing attempt to work through the issue via online platforms. Additionally, NT required municipalities to have cash coverage of three months for disaster relief purposes. It was a form of preparedness in that municipalities should be able to survive for three months amidst a disaster.
Briefing by the Congress of South African Trade Unions (COSATU)
Mr Matthew Parks, COSATU Parliamentary Coordinator, said that the DoRA had not adequately addressed the key economic challenges that existed prior to the COVID-19 pandemic. For instance, the 40% and rising unemployment, the rising levels of corruption and wasteful expenditure as well as the economic recession, were all not alleviated. He elaborated on COSATU’s 2020 budget expectations, which included, among others, expanding the South African Reserve Bank (SARB) mandate, state-owned enterprises and debt plans as well as jobs and investment plans. He explained the four fundamental concerns that COSATU had with the budget. COSATU made the following budget proposals:
- The urgent tabling of new budget in Parliament, which should have a drastic reallocation of funding by cancelling programmes no longer relevant or urgent – such as travel, advertising and luxury programmes. Funds should be shifted to key covid-19 priority departments such as Health, Basic Education, Transport, Trade and Industry, Human Settlements and Water and Sanitation.
- The need to build upon the R500 billion economic relief measures announced by the President.
- Injecting impact Investments aligned with Regulation 28
- Outsourcing international financial loans in which conditionalities, interest rate and foreign exchange rates were managed. Approaching the International Monetary Fund (IMF) was difficult in terms of alliance but the President had given reassurance that the sovereignty of the country would not be diminished and the interest rate of 1% was lower than other institutions.
- Revenue sources should be boosted through a tax increase on income above R1.5 million, the top two income tax brackets, inflation adjustments and inheritance. COSATU would also like to see the VAT hike relief that would increase free electricity and water to in different homes
- A SARS clean-up in which there was customs enforcement and tightening on illicit trade.
Mr Parks presented the Committee with several proposals on urgently dealing with corruption and excessive government expenditure. He said the Public Service Wage Bill was stable at 35%, in line with international norms. He warned of the danger of decapacitating public service. COSATU proposed that government should honour the existing wage agreement, reduce the salaries given to Cabinet Members, mayoral committees and politicians’ perks. The issue of ghost posts needed to be tackled more urgently.
He elaborated on the specific departmental appropriations in the Departments of Trade, Industry and Competition; Employment and Labour; Health; Basic Education; Transport; CoGTA; Public Works; Agriculture, Land Reform and Rural Development; Human Settlements; Water and Sanitation; and Social Development.
Mr Ryder said that COSATU was holding government to a three-year agreement that was signed under a different administration and in an economic climate that had changed vastly. The impact of COVID-19 resulted in an urgent need to reprioritise funding and trying to keep to the terms of the agreement regarding the public wage bill was disingenuous. He asked if COSATU was willing to renegotiate the terms in any way.
Mr Parks responded that issue of the wage bill belonged to the PSBC. However, it was key to the budget and, therefore, important for the Committee to engage and discuss. What was concerning was how government approached the agreement in 2020. It had placed unions in a difficult position, as the agreement was withdrawn with no alternative proposal offered on the table. Added to this, the Minister of Finance announced, in the budget speech, a reduction in the public wage bill. Had government engaged in October about the crisis and way forward, it would have made things a bit better. However, unions were not blind to the crisis. COSATU had done some costing and had a way to assist government reach the R160bn target through the next three wage agreements. There were savings from the inflation rate adjustments as inflation had decreased from 5.5% to 3.8%, as well as a freeze in increase for management. The other proposal around the wage bill was to have a single wage process for national and provincial government and SOEs. The real concern was at the management level of SOEs. It was difficult to tell a nurse, who was at the forefront of the fight against the pandemic, that she was earning too much when the CEO of the Giyani Water board earned R1 million monthly, and 800 managers in Eskom earned above R200 million. In future, government needed to approach the issue strategically and considerately.
Mr Du Toit expressed that he was disappointed by COSATU’s request for more inspectors to police workers. He asked why COSATU did not place emphasis on assistance to be given to all South Africans, regardless of race and ethnicity – to ensure job security.
Mr Parks said that nothing scared workers more than unemployment; this was the number one crisis. He added that it was difficult to motivate workers to go to work when they fear for their lives. Essential workers were overwhelmingly affected by COVID-19. The issue of infections among essential workers, cashiers and prison wardens needed to be addressed, hence the request for the deployment of health inspectors. Having one inspector per 1000 places of work would be inadequate.
Mr Njadu said that the Committee should look into the focus areas that were presented.
Mr Carrim agreed with the long list of demands. However, it lacked clarity on the sources of funds. He acknowledged that it was not the responsibility of COSATU or any public stakeholder to come up with sources of funding and costing. However, with this list of demands, there needed to be a clearer set of priorities.
He said there needed to be a clear set of reasons for not approaching the IMF, outside of ideological dogmatism. The implications of paying back dollar-denominated funding must be considered. There was also a requirement for government transparency on the conditions and implications of the loan.
Mr Parks stated that COSATU was in agreement that the country needed to tap into all the resources it possibly could to combat the impact of the pandemic. COSATU had been assured by the President that there were no conditions that would impact the sovereignty of South Africa attached to the IMF loan. The 1% interest rate was also appealing. However, there must be balance to avoid having too much debt in dollars. COSATU encouraged engagement on the IMF matter in an open manner.
He said the real source of revenue was domestic investment that was well coordinated and conducted effectively. Investment must be linked to job creation. Additionally, funding would have to come from other departments brutally reprioritising expenditure. Government would never have enough funds to tackle these issues if it did not tackle corruption and wasteful expenditure. Instead, it would just move in vicious cycles of revenue shortfalls.
The Chairperson said the three year agreement was difficult to obtain. She requested the Committee to play it safe and not take over the work of the Public Service Coordinating Bargaining Council (PSBC) which was where the agreement could be changed. She urged Members not to take over the employer and employee engagements.
The Chairperson gave a summary of written submissions. Members requested to ask questions and for them to be sent back to public stakeholder participants for responses, in future.
The Committee Secretary presented a summary of the nine written submissions received by the Committee, excluding COSATU’s ones. Three more submissions were received after the closing date.
(See summary of written submissions) / (Refer to audio)
Mr Ryder agreed with one of the submissions that the Bill Is complex and said it is because it deals with complex matters. He remarked that it is unfortunate that the submission does not give an alternative. Mr Ryder acknowledged the inputs of the public and proposed that the Committee note the submissions in its report, so it can comment on each of the inputs.
Members agreed to Mr Ryder’s proposal.
Adoption of meeting minutes
The Chairperson announced that Members were to raise concerns on the meeting minutes with the Committee Secretary beforehand, as the minutes were already circulated.
The Chairperson proposed the adoption of five sets of meeting minutes:
Mr Du Toit moved for the adoption of the meeting minutes held on 05 December 2019.
Mr Carrim seconded the motion.
Mr Njadu moved for the adoption of the meeting minutes held on 19 February 2020.
Mr Carrim seconded the motion.
Mr Mkiva moved for the adoption of the meeting minutes held on 03 March 2020
Mr Carrim seconded the motion.
Mr Carrim moved for the adoption of the meeting minutes for 22 April 2020.
Mr Njadu seconded the motion.
Mr Njadu moved for the adoption of the meeting minutes for 27 February 2020.
Mr Ryder seconded the motion.
The Chairperson declared all the meeting minutes adopted.
The Chairperson announced that she had received a letter from the Minister requesting the Committee to amend its programme in order to fast-track passing the DoRB and appropriations by the end of May.
The Chairperson consulted with legal liaisons and some of the leadership on this and found that the Committee would not be able to meet that deadline regarding the DoRB, as it would pose serious challenges. The Committee would not be able to make changes to the programme as far as the DoRB was concerned. She announced that there would be joint meetings with the Standing Committee of Appropriations to fast-track the process. The process might be finalised by 09 June 2020.
Mr Ryder raised a concern with the allocation of time to Members in the joint meetings under the current circumstances. Given that the meeting had double the number of Members and that there was a time limit due to bandwidth concerns, it diluted the ability of the Committee to adequately discuss and fulfil its mandate.
He also requested that Members be given notice of the plenary session within reasonable time. This was in light of the fact that flights were no longer operational and Members would have to drive down to Cape Town from different parts of the country to attend.
The Chairperson said that the Committee would receive information on the sittings by Thursday, 15 May. She requested NT to submit comments on the written submissions to the Committee secretariat.
The Chairperson, in closing, thanked all Members for being understanding and cooperating with the recent changes in how the Committee conducted its oversight mandate. She also thanked the support staff and stakeholders.
The meeting was adjourned.
Download as PDF
You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.
See detailed instructions for your browser here.