Division of Revenue Amendment Bill & Adjustments Appropriation Bill: FFC & SALGA briefings

Standing Committee on Appropriations

09 July 2020
Chairperson: Mr S Buthelezi (ANC), Ms D Mahlangu (ANC, Mpumalanga)
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Meeting Summary

Video: Division of Revenue Amendment Bill & Adjustments Appropriation Bill: FFC & SALGA briefings
Audio: SC Approp 9 July 2020 

The Standing and Select Committees on Appropriations held a joint virtual meeting to receive input from the Financial and Fiscal Commission (FFC) and the South African Local Government Association (SALGA) on the effects of the Division of Revenue Amendment Bill and Adjustments Appropriation Bill.

The FFC presentation focused on the reprioritisation of appropriations in the budget, paying specific attention to which departments were losing funding and how the budget affected the division of revenue at the national, provincial and local level. The FFC submitted that the budget should not be seen as a policy statement, but rather a set of technical adjustments to allow short-term flexibility. It noted its concerns over the allocation method for municipal funding, proposing that conditional grants would mitigate possible misspending of emergency funding, and the criteria or lack thereof for the reprioritisation of funding in provincial budgets. It also proposed that zero-based budgeting would be difficult to achieve and unlikely to make much of a difference in expenditure.

SALGA raised its efforts to improve accountability for municipalities and to attempt to reduce the R180bn municipal debtors’ book. It stated its dissatisfaction that rather than of the promised R20bn in relief for municipalities, only R11bn in new appropriations was granted, and municipalities had to reprioritise R9bn. It expected a sharp increase in financially distressed and insolvent municipalities as conditional grants and revenue collection declined as a result of the Covid-19 pandemic.

Members’ questions prioritised the worsening results of the Auditor-General’s review of municipal finances, criticising SALGA’s performance in addressing corruption and lack of accountability at a municipal level. Members were concerned over the model of municipal funding and the method used to determine which conditional grants would be suspended or reduced. Members questioned how municipal councils could be allowed to pass budgets that they would not be able to fund from their transfers and own revenue. Other questions included the source of funding for the R3bn bailout of the Land Bank and the FFC’s views on provision of funding for financially troubled SOEs.

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Meeting report

Co-Chairperson Buthelezi opened the meeting and welcomed the joint sitting. Apologies were tendered by Mr A Shaik Emam (NFP) and Ms N Ntlangwini (EFF).

The Committee would receive briefings from the Financial and Fiscal Commission (FFC) and the South African Local Government Association (SALGA) on the Division of Revenue Amendment Bill and the Adjustments Appropriation Bill.

He ceded to the FFC.

Briefing by the Financial and Fiscal Commission (FFC)

Professor Daniel Plaatjies, Chairperson, FFC, noted that the Committee had heard from the FFC repeatedly in the preceding few months. All of its presentations had talked to structural deficiencies in the economy and how the fiscus could react, and so the FFC would not repeat these issues. He submitted that the presentation took place in the contact of the human and health crisis caused by the Covid-19 pandemic, where there were many uncertainties.

The FFC had previously given the Committee its view on the economic outcome of the pandemic and what policy should do in this regard. The FFC had also given its opinion on criteria for budget reprioritisation. National Treasury had made it clear that reprioritisations would take place in the Provincial Equitable Share, which meant provinces had the constitutional authority to decide where cuts should be made.

The FFC presentation would focus on the repurposing of funds.

Dr Mkhululi Ncube, Programme Manager: Local Government Unit, FFC, stated that the Bills enhanced accountability and improved flexibility in implementation.

On the revenue side, there was a fall in the revenue of R198bn and an increase in debt service costs of R7.1bn, to 4.9% of GDP. The FFC noted that at the time of the February Budget it had raised the possibility of new revenue from the digital economy or environmental taxes.

Transfers and subsidies would increase by R12bn, mostly going to poorer households.

The net increase to current payments was driven by increases to goods and services of R2.4bn, whilst compensation saw a R591m reduction.


The FFC noted that the 2020 Budget intended to cut employee compensation, but the extent to which this would be achieved was questionable. Scenario analysis as to what the feasible cut in COE would be was necessary.

Funds to SOEs diverted funds away from critical areas of service delivery, and the FFC posited a need to reform SOEs.

The biggest increase went to Health, which was understandable. The biggest reduction was to Learning and Culture.

The FFC was worried by the extent of the Health Department adjustment of R2.9bn – would this be sufficient? And would the economic recovery allocation be sufficient?

Dr Ncube highlighted the 10 least and most affected appropriation votes. Reprioritisation was particularly aggressive in Agriculture, Trade, Mineral Resources, Science and Innovation and Tourism. The FFC noted that many of the Departments losing funding acted as key levers for growth. The Agriculture and Land Reform reprioritisation should be made up for by being prioritised at a later stage, given its importance to food security and rural development. Dr Ncube also explained the importance of all the departments whose funds had been reprioritised.

Dr Ncube also highlighted the R11bn increase in the appropriation to Cooperative Governance, which would be transferred to the local government sphere, as well as the R25bn increase to Social Development.

The Adjustment Budget advanced a slight increase in the national share of revenue and a slight decline in provinces. The net change for National Departments was +R33bn. Provinces were set to lose R4bn in conditional grant allocations. There was a 5.6% increase in the Local Government Equitable Share despite a 2.8% decrease in grants.

The lack of adequate support for farming activities was a challenge faced by provinces. There were high backlogs in road and transport maintenance. The COVID pandemic aggravated issues faced by provinces.

The FFC said that it was unclear what the criteria for reprioritisations of R20bn in provincial funding was, and that this may result in imbalanced service delivery across provinces. In the absence of a uniform criteria for reprioritisation, provinces should report to their legislatures on how reprioritisation was achieved.

Grants affected included the Human Settlements Development Grant, Education Infrastructure Grant and Provincial Roads Maintenance Grant (revised downward), whereas the HIV TB Malaria Community Outreach Grant was increased. The HSDG was a particularly important grant.

The FFC noted pre-existing challenges in Local govt, especially unfunded mandates. The Covid-19 pandemic had exacerbated the challenges faced by local government.

The President had announced an additional allocation of R20bn to local government, of which there was only R11bn in new money with a R9bn reprioritisation. Rural municipalities had the highest growth in appropriations, with metros the lowest. Metros received on average, per household, the least money. The FFC was of the opinion metros should receive more as they rely on own-income revenue that was affected by the pandemic. Metros also faced a disproportionate burden of the pandemic. The allocation mechanism was key – there were risks in allocating funds through the LGES as funds could be diverted for non-Covid expenses. The FFC proposed using a conditional allocation.

The FFC concluded that the Adjustment Budget should not be seen as a policy statement, but rather a technical adjustment. Policy changes were expected in the Medium-Term Budget Policy Statement. Revenues available were diminishing fast. There was a need for a bold reform agenda anchored on fighting corruption, strengthening state capacity, restoring the integrity of key state institutions and the improvement of policy implementation. Support for investment and employment had to be underpinned by economic reform.

There was also a need to enhance transparency and strengthen oversight where spending had to be done quickly. Despite the disruption caused by the pandemic, reprioritisation should be aligned with the NDP goals and national priorities.

Briefing by South African Local Government Association (SALGA)

Councillor TC Ngubane, Member of the SALGA National Executive Committee, introduced the Municipal Finance Director at SALGA Ms Khomotso Letsatsi.

Ms Letsatsi noted that local government had received a 5.6% increase in its allocation.

SALGA’s understanding was that, based on the President’s announcement, local government could expect R20bn in new allocations. National Treasury later clarified that only R11bn would be allocated, and R9bn would have to be reprioritised from conditional grants.

SALGA had taken a resolution to intensify accountability from local government, noting the worsening outcomes in audits of municipalities. As a result of Covid-19, local government came from a low base especially when one looked at the large debtors’ book of municipalities, with revenue losses of up to 60% during the pandemic in certain municipalities. Municipal revenue collection decline was sharply differentiated by municipality. R180bn was on the municipal debtors’ book. SALGA noted a positive correlation between municipalities providing electricity directly to citizens and their ability to collect revenue.

In terms of the multiyear wage settlement, the discussion about deferring wage increases was ongoing between National Treasury and unions.

SALGA noted it was likely there would be an increase in financially distressed municipalities, and was expecting an increase in the number of insolvent municipalities as well. SALGA would work closely with law enforcement agencies to pursue consequence management for bad audit outcomes.

SALGA proposed that revenue under-recovery should be considered for the whole local government sector, not just metros. SALGA proposed that there was a need for a radical review of the proportions of allocations to the 3 spheres.

Discussion

Co-Chairperson Buthelezi ceded to Co-Chairperson Mahlangu.

Ms D Peters (ANC) proposed that it was an indictment on SALGA that municipalities were not agile enough to react to the pandemic. She asked SALGA what it did when councillors were accused of corruption and misuse of Covid-19 relief funds, recalling stories of food parcels and funds being diverted by councillors. She raised an invoice circulating on social media of R3m for mass mobilisation as an example. Revenue collection had always been a SALGA problem – it should have clarified what it was doing to improve revenue collection. What had SALGA done to support municipalities in their revenue collection endeavours? What had SALGA done to ensure municipalities would pay Eskom? She praised Ekurhuleni and Polokwane for leading the way in this regard. The funds being given had been badly utilised over the years. Covid-19 had revealed a disconnect between the Department of Social Development and SALGA in terms of treatment of the homeless, who had been left in the cold. The FFC said there had to be economic reforms implemented – could it give examples, noting the govt’s efforts to strengthen SOEs at Eskom and Prasa. Regarding government realising a primary surplus in 3 years – would this be possible? In view of the FFC’s experience, had Parliament been effective in playing its oversight role in realising consequence management? Were there countries that had successfully implemented Zero Based Budgeting and what were the best practices if so?

Mr O Mathafa (ANC) appreciated the references to previous presentations by the FFC and SALGA. He echoed the issue of wasteful municipal expenditure raised by Ms Peters, bringing up the example of a R21.7m programme to build a sports complex in the Free State, which only resulted in the construction of a fence. Regarding matters of accountability, he accepted that no one could plan for Covid-19. What was SALGA’s view in terms of municipalities executing their emergency spending? Was this being done according to best practice, especially in Water and Sanitation? Did SALGA view municipal budgets as responsive to reality? Mr Mathafa asked the FFC whether it had a view as to which financially distressed municipalities Parliament should focus on.

Mr M Saziwa (ANC, Eastern Cape) asked the FFC whether only R11bn being appropriated for municipalities was not Treasury undermining the President. Given that it relied on suspension of grants. What was the logic behind reprioritising grants away from municipalities that spent their money well? Why was it that municipalities underspent grants? Did Treasury assess the capacity of municipalities to spend before disbursing grants?

Mr W Aucamp (DA, Northern Cape) agreed with the FFC that SOEs posed a serious risk to the fiscus. He noted that the DA had said for a long time that appropriations for SOEs was taking money away from the poorest of the poor. Reforms of SOEs were long overdue. He noted that the debt service costs had increased by R7bn, which was R20m a day. These costs were there due to pumping money into failing SOEs. What reforms did the FFC suggest? Agriculture and Trade were receiving less money despite the need to focus on these sectors as these could stimulate growth. Jobs were key – did the FFC not think it would be more feasible to place emphasis on those sectors that could provide growth?

Mr V Lwana (ANC, Eastern Cape) appreciated that Health and Social Development had not been negatively affected as they were at the coalface of fighting the pandemic. He agreed with the comments raised by Ms Peters pertaining to SALGA. He was concerned over the suspension of conditional grants to municipalities, given their importance to local economies. He agreed with the FFC that the country as a whole was not adequately driving infrastructure development. He noted the declining budget of Small Business Development – this was worrying if SMMEs were meant to drive growth. 

Mr D Joseph (DA) asked whether the R3bn Land Bank bailout was money coming from the Department of Agriculture, Land Reform and Rural Development. He supported the FFC’s statement about the possible unevenness of criteria for provincial allocations. In the last 5 years only 2 municipalities had been placed under Section 139 in the Western Cape. He supported the FFC’s proposal to make Covid-related municipal grants conditional to ensure the correct spending. He agreed that local government needed more money. But what was the mandate of the MPAC? Accountability was not there at municipal level.

Mr M Moletsane (EFF, Free State) argued that it was important for SALGA to understand that resource injection was not the only issue at municipal level, and stressed the need for fraud prevention and accountability. He raised the issue of the misspending of R3m in OR Tambo District Municipality. Having noted SALGA resolving to communicate with municipal executives, did it believe that an independent investigation through SIU or Hawks was needed?

Mr D Ryder (DA, Gauteng) said that recommendations from SALGA would have been welcome. He was concerned that the method of allocation had not been made known for the allocation of the R20bn announced by the President. Did SALGA not agree that money should be given to municipalities that had a good record of governance?

Mr D Smit (FF+, Free State) apologised for his late joining.

Mr X Qayiso (ANC) noted the need for support for SOEs to drive the developmental state. He noted FFC’s reference to “unpopular reforms” and asked for clarification.

Mr J Mpisi (ANC, Gauteng) asked SALGA to respond on the political issue of the Auditor General’s report as it had not touched on this. He noted that municipalities had performed extremely poorly. How was SALGA monitoring implementation using the money budgeted for Covid? He thought that, post-Covid, the country would be sitting with many instances of misuse of funds if the money appropriated was not monitored. How was the issue of negotiations on the wage bill with unions being approached by SALGA? He asked FFC how the new appropriations should be spent. He asked SALGA to address the issue of the deceleration of spending vs cutting of electricity in Winter periods. How was SALGA managing this situation to make sure that there was not too much cutting of electricity during winter?

Mr Z Mlenzana (ANC) asked what SALGA was doing about the culture of non-expenditure of grants. He asked the FFC whether the budget spoke to issues for rural and indigent municipalities. Did the budget address infrastructure development for economic recovery? Was the District Development Model included in the budget? How could we avoid a situation where we created a welfare state? Did the presenters see an issue in the reduction of the Comprehensive Agricultural Support Grant?


Mr F Du Toit (FF+) stated that conditional grants had been cut which would have a negative impact on infrastructure. Municipalities were expected to adjust budgets downward due to an anticipated decline in revenue. This decline in revenue had already happened. Did SALGA engage with municipalities prior to them approving their budgets? According to his knowledge most municipalities approved budgets higher than the previous year – there would not be sufficient funds to complete these budgets. How could municipalities fulfil their debts to Eskom? Pockets were empty. How would municipalities address the issues posed by the mooted expansion in water services and limited electricity supply?

Ms R Liebenberg (DA, Northern Cape) asked if the FFC had considered the severity of the drought across the country and the effect this would have on rural areas. Was there a timeframe on when provincial governments should present to Parliament on their revised budgets? What did SALGA do to ensure a debt recovery programme for municipalities? It was problematic that municipalities went about payments on an ad hoc basis. Was SALGA reconsidering their training of councillors?

Mr N Kwankwa (UDM) pointed out that other countries had a paycheque protection programme to help business to pay employees during the pandemic. Should the Reserve Bank not go the same way? Central banks were playing a critical role in interventions in other countries. Regarding the suspension of conditional grants – was the government not punishing people for the sins of their leaders? Some municipalities were responsible for the same issues every year, but government did not implement consequence management. When one implemented cuts, one harmed service delivery. If the Budget was re-appropriating money for the Land Bank from the DALRRD wouldn’t this harm agriculture and land reform? There were governance challenges in local government sector. What was SALGA doing about this? Scandals were happening year-in and year-out. It couldn’t be that the situation worsened every year. The FFC presentation cited failure of other spheres of government such as national and provincial in playing effective oversight role.

Mr Y Carrim (ANC, KwaZulu-Natal) asked how much of the R500bn was a stimulus package. He understood money had to be allocated to Health, SAPS and SANDF. But there were many areas including Agriculture and Tourism where support was needed. He added that SALGA could not be blamed for issues arising from Covid-19. All 3 spheres had to cooperate – local government failures were also a failure of the other spheres of government.

Co-Chairperson Buthelezi said that the biggest problem in the budget was the lack of growth in collection of revenue. What was SALGA doing to ensure economic growth at a local level? What was the maximum amount for Eskom levelling penalties? He noted the issue of the use of consultants at municipal level. It had become difficult to argue in favour of municipalities when the money they were given was not used properly. He thought it was clear that there was not enough communication between Treasury and SALGA. He asked the FFC what had contributed to the low consumer and business confidence. Was it desirable for the National Treasury to achieve a primary surplus?

Mr Nkwankwa argued that, in many developed economies, the central bank was active and was even considering paying off municipal debts – why was this not possible in South Africa?

Councilor L Mapena, Member of SALGA KwaZulu-Natal PEC, expressed disappointment that members had ambushed SALGA with questions on the Auditor- General’s report, given SALGA had been instructed on what to present on in the meeting. Most of the questions asked were questions that SALGA had been asking national government. What Ms Peters and the Co-Chairperson had asked were questions for Parliament. Local government was the most regulated sphere of government. Every new COGTA minister had their own model for local government without paying attention to the previous model. When one looked at the financing of government, local government did the majority of service delivery but received little money. Local government raised revenue mostly from poor people who could not provide revenue. The funding model was biased against local government. Municipalities had been arguing for service agreements with Eskom. On a monthly basis, S71 reports were sent to Treasury. Appropriations Committees should help with the monitoring of these issues. The SALGA President had spoken loudly against corruption in local government. SALGA had made plans to professionalise local government, but it did not get supported by national government. Societal issues also affected the functioning of local government. The nature of leadership was determined by the societal values of leadership. He noted his opposition to the institutionalisation of the Covid Special Grant. SALGA was working with provincial government to come up with economic development models, and looking at developing the township economy. Regarding the issue of salaries, there was a 3-year agreement with unions. Special Counsels had told SALGA clearly what it could and couldn’t do. There was a 3-year agreement which was a contract between employer and employee. SALGA was seeking an equitable solution with unions.

Councillor Ngubane said that the first issue was that of the public announcement by the President of R20bn to be allocated to local government. SALGA was later shocked to learn that local government was only receiving R11bn in new allocations. National government had not given the reasons and rationale for this departure. Taking R9bn from conditional grants was robbing Peter to pay Paul. When money was allocated to municipalities, it was allocated to specific projects – cutting grants was taking money away from the South African people. National Treasury should not consider money that could not be spent during the financial year as savings – it could not be spent due to lockdown, not because of subjective weaknesses of municipalities. SALGA was of the view that these funds had to be rolled over. Local government only received 8.9% of the national purse.

Councillor S Mondlane, Member of the SALGA North West PEC, wanted to reflect on the issue of Eskom. SALGA was part of the discussions held on the response to Covid-19. Parliament should consider that municipalities were having challenges where they could not provide electricity directly to customers, which was hindering municipal revenue collection. Eskom should hand over licenses for distribution to municipalities.

Prof Plaatjies stated that the state of local government was a persistent issue. The process of reform was being kicked down the road. It was important to note that it was not helpful to condemn municipalities without investigating the model of local government. There was a set of issues related to the financial management of municipalities highlighted by the AG. Then there were issues of governance and leadership in councils, and the technical capabilities of staff. These issues were compounded by the demands placed on municipalities. Citizens knew they had a local municipality, but when there were issues, they took their grievances straight to national government. The spheres of government had to support each other. Many municipalities were not economically capable and had no economic activity, which made it so that there could not be own revenue raised and they were thus reliant on transfers. Should Parliament not look at issues of own revenues in municipalities, and the perverse incentives of conditional grants? He noted issues on the equitable share allocation given the historic problems faced by municipalities. Debt issues were also a problem. How could municipalities sign debt agreements with Eskom when they could not even fill their mandates?  Differential costs of electricity were also an issue. Municipalities could not afford to pay interest on Eskom debt. The government continuously rescue Eskom through bailouts but refused to do the same for municipalities. Historic debt was dooming municipalities

Regarding Zero Based Budgeting, Prof Plaatjies argued the need for the data, time and resources to do this. It was tried elsewhere in the 1990s and it was abandoned. Nigeria recently tried and abandoned it. The majority of government spending was spent on social transfers, wages and debt repayment. The amount of money available for ZBB was negligible.

The FFC could not account for reforms on SOEs – this was a question for the responsible members of the executive. The budget was a response to a human and health crisis. There were issues related to the take-up of grants. More importantly, South Africa would have to look at SOE bailouts. Contingent liabilities were important too.

4 categories of criteria needed to be considered for allocations. Performance, fairness, impact and essential vs non-essential with regards to the Covid-19 response. Issues were raised on deficit budgeting and approval in municipalities. The law allowed for this, but National Treasury had to agree for this to happen. Could the National Treasury say why it could approve or refuse budgets? Prof Plaatjies raised the example of an R800m municipal budget with revenue of R360m. On what basis did councillors approve this kind of budget?

Commissioner S Kholwane, FFC, – on key departments for economic recovery – said the FFC was concerned about reductions, but it accepted the necessity in the short term. The FFC expected Agriculture, Tourism and other departments where there were reductions to receive increased allocations from the National Treasury at a later stage. It did not agree with a long-term reduction in these budgets.

Commissioner L Erasmus (FFC) argued it would be difficult to attain ZBB. On value for money spending in the LGES, the FFC shared Parliament’s concern bearing in mind AGSA report. The National Treasury did respond that circulars were issued in this regard and the chartered accounts would cover this. However, the spending would only be recorded, not the effect of this spending. Consequence management was necessary and had to be visible.

Prof Plaatjies noted that he did not see becoming a welfare state as a bad thing as long as SA could address the plight of its citizens. The Asian Tigers were an unlikely comparison for a democratic SA. The face of poverty in SA was clear. The job of government was to address inequality. If that made South Africa a welfare state, this would be a good development. Either South Africa addressed poverty and inequality, or it would end up with a revolution on its hands. There was a need to re-organise the state to respond to problems.

Co-Chairperson Mahlangu addressed the comment of SALGA being ambushed by the questions of the Committee. If SALGA was not able to account to the Committee its future engagements would be tense. She noted the speech of the SALGA President which was robust. Year on year municipalities did not perform and SALGA came to Parliament and said the same things.

Mr Mpisi said that members were raising AG issues not to attack the SALGA leadership, but because they were concerned about the state of local government. This was an issue members and councillors could not shy away from. What members could ask about could not be prescribed. The topic of the meeting was municipal finance – what municipalities did with the money was key to this. SALGA councillors had to understand the predicament members were in. Local government leadership had to understand the concerns of the Committees.

Mr Joseph proposed that the Committees needed to have a workshop with SALGA and there was a need to have a long-term engagement with SALGA on local government.

Co-Chairperson Buthelezi agreed with Mr Joseph’s proposal. He proposed that the Ministers of Finance and COGTA needed to meet with SALGA on this matter before the Committees. He argued there was no way to talk about money and not talk about audit outcomes.

Councillor Ngubane acknowledged challenges faced by local government. The AG’s report suggested that local government was in serious trouble. SALGA was not burying its head in the sand. SALGA was designing a consequence and accountability framework to assure municipal politicians and administrators were held to account for outcomes. It was calling for the formation of professional bodies for municipal officials. Municipal managers should not be able to go 4 years unpunished for negative audit outcomes. Turnaround for municipalities required the presence of adequate consequence management. South Africa was facing a decay in public morality. People were doing wrong things deliberately. SALGA had also developed an approach for revenue collection. Municipalities had 3 customer types: the first was government, which owed municipalities lots of money.

Mr Du Toit requested a written response to the issues raised by members.

Co-Chairperson Mahlangu requested the Committee Secretariats to help SALGA with this.

Co-Chairperson Buthelezi agreed that good municipal government was in the interests of all spheres of government.

Co-Chairperson Mahlangu noted the need for a timeframe for SALGA’s response.

Councillor Mapena noted that SALGA would give the responses on the same evening.

Councillor Ngubane registered his concern that SALGA had not been given enough time to respond.

Co-Chairperson Mahlangu noted that this was a concern of presenters and members alike. She proposed that questions and answers should always get straight to the point rather than talking around issues.

Ms Peters argued that the SALGA delegation should understand the point of the meeting. Committees were a platform for SALGA to air their problems and challenges. The Committees were responsible for appropriating money to local government, so were equal partners in the issues. SALGA should not squander the opportunity to interact with the legislature. The previous year the Committee had uplifted SALGA’s proposals to help them. She noted that SALGA sat in the NCOP, in the PCC, and in the COGTA MINMEC.

Co-Chairperson Buthelezi thanked the presenters and members. He noted that the issues relating to local government were so grave they could not be addressed in such a short timeframe.

The meeting was adjourned.

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