2021 Division of Revenue Bill: National Treasury briefing

Meeting report

The Chairperson opened the meeting and invited the delegation of National Treasury to make their presentation

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, said that the Division of Revenue (DoR) for the 2021 Medium Term Expenditure Framework (MTEF) period had a strong redistributive nature. The equitable share of rural municipalities was three times more per capita and per household than that of urban areas because of the stronger ability of metro municipalities to collect revenue.

She said the emerging trends in salaries across the three spheres of government showed that compensation had outpaced economic performance and nominal Gross Domestic Product (GDP) per capita and this needed to be brought under control and reversed. Statistics from Stats SA suggested that public-sector compensation growth had outpaced private sector compensation growth over the past decade.

Spending reviews revealed that significant savings could be made in the areas of the HIV/AIDS conditional grant, in managing overtime and in goods and services procurement. The Government continued to expand the tools available for provinces and municipalities to build operational and technical capacity to improve value for money in spending. There would be salary freezes across the board and management numbers would be decreased through natural attrition and early retirement.

A Supply Chain Management (SCM) review had shown that fragmented IT systems contributed to inefficiency and there could be considerable cost savings and process efficiency by using IT systems in procurement.

Key factors affecting sustainability were unfunded municipal budgets and the weak implementation of capacity building programs and initiatives by provincial and national departments. She said the problem could only be solved through a multi-pronged response with other stakeholders.

Mr Bongani Daka, Intergovernmental Policy and Planning Unit, National Treasury, briefed the Committee on provincial allocations. He said conditional grants were growing faster than the equitable share allocations. The growth in grants was 4.6 percent and the growth in equitable share was 0.8 percent. He said 82 percent of transfers to provinces were through the equitable share. The provincial equitable share (PES) formula was updated annually. Changes since the 2020 Medium Term Budget Policy Statement (MTBPS) were that R8 billion was added in 2021/ 22 to the PES in response to COVID 19 and R2.4 billion was added for 2021/22 and 2022/23 to the HIV, TB, Malaria and Community Outreach grants. Another change was that R140 million was shifted to the Human Resources and Training Grant for the hiring of medical interns. On the changes to conditional grants, he said that from 2021/22 there would be a new standalone Informal Settlement Upgrading Grant for the upgrading of informal settlements. The Title Deed Restoration Grant was re-incorporated in the Human Settlements Development Grant to continue with the eradication of title deed registration backlogs.

Ms Letsepa Pakkies, Senior Economist, National Treasury, briefed the Committee on Local Government allocations. She said that conditional grants to municipalities were growing at 7.3 percent, above inflation, over the MTEF. She said the local government equitable share (LGES) formula had updated data for household growth, bulk water and electricity increases and projected Consumer Price Index (CPI).

She said there were changes to the Informal Settlements Upgrading Partnership Grant; the Programme and Project Preparation Support Grant; and the asset management provision in the Municipal Infrastructure Grant.

Outcomes from a Budget Forum Lekgotla were: a more stringent approach to enforcement of legislation; to manage the risks associated with the local government elections through appropriate political messaging; that governance and political leadership in local government needed to be addressed as a pre-condition for financial and service delivery sustainability; and that all spheres needed to collaborate to ensure that Eskom signed the Service Delivery Agreement provided for by the  Municipal Systems Act.

Ms Zethu Nkube, Deputy Director-General (DDG): Local Government and Budget Framework, National Treasury, then spoke on the Division of Revenue Bill clauses. She said there had been a policy adjustment and the requirement that a disaster to be declared in order for disaster relief funding to be released had been replaced with the requirement for classification. The requirement for metropolitan municipalities to submit Built Environment Performance Plans (BEPPs) to access infrastructure grants had been removed.

Mr Daka then spoke on National Treasury’s responses to recommendations by the Standing and Select Committees on Appropriations on the Division of Revenue. (See Slide 33 of National Treasury presentation.)

Discussion

Mr D Ryder (DA Gauteng) questioned whether the DoR allocation of nine percent to local government was enough. He said approximately 40 percent of municipalities were presenting unfunded budgets. This was against the Municipal Finance Management Act (MFMA). Municipalities were arguing that they had a legacy of Eskom and water supply bills. It had been agreed the previous year that there would be a budget lekgotla with local government. He had heard nothing in the presentation on the outcomes of the budget lekgotla. What was Treasury’s perspective on what happened in the local government budget lekgotla? He had asked to be a participant, even if only as an observer. He said the way local government was being funded could not continue as local government was spending money badly. What would happen to, for example, legacy debt for electricity and water? What variables were included in calculating the local government equitable share? And what was it meant to be spent on? Was there any monitoring on what the equitable share was being spent on?

On the R350 Social Relief of Distress (SRD) grant, he asked if the extension of this grant would be rolled out to provinces or be handled at a national level.

He wanted more information on specific provincial grants like the housing grant and would it be changing, as the Minister had said in the NCOP that housing provision was going to change to a site and service form of housing delivery. Was this taken into account in the budget roll out and in the move of some grants from direct to indirect grants? Would more centralisation of provincial budgets occur, as had happened to national budgets?

Mr S Du Toit (FF+ North West) asked what additional measures were in place to prevent corruption related to the additional provision in the PES for Covid 19 funding.

He asked for further elaboration on the 3.7 percent growth in the allocation for council support.

How many households were making use of free basic services, and what was the growth over the past two years? 

What was Treasury's view on municipalities that paid employees danger pay for working during the hard lockdown?

On the different grants available to farmers, he asked how many grants were available to emerging farmers.

Mr M Moletsane (EFF Free State) said he hoped that the process to review the DoR model would be speeded up as a new model was overdue.

Responses

Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, National Treasury, said overseeing the budget process in local government and funded budgets was at the heart of the reform Treasury was facilitating. For the current year, 106 municipalities did not table funded budgets. Treasury assessed all budgets using the methodology of determining whether budgets were funded according to the MFMA. Treasury believed that if these issues were not resolved, then issues raised by the Auditor-General would not be resolved. A lot of time was spent by Treasury in improving municipal planning and budgeting practices.

Treasury had issued two circulars recently which included the issue of danger allowances related to Covid-19 matters. Treasury had articulated the criteria to be considered, but this matter related to the South African Local Government Association (SALGA).

Treasury had reduced the unfunded budgets from 106 to 95 and had delayed the transfer of funds to those municipalities that had not considered Treasury’s advice order to ensure that municipalities took this responsibility seriously.

Local government’s equitable share was 9.4 percent, but municipalities, unlike provinces, had extensive tax powers. Outstanding debts to municipalities now stood at R230 billion. Municipalities had delivered services but not collected R230 billion of revenue. There was a historical element to this debt, but one could not rely on the fiscus to finance all the municipalities’ activities.

Municipalities did not use the subsidy given to them on what it was intended for, that it be used for the indigent. Treasury had facilitated the Municipal Standard Chart of Accounts (mSCOA) reform which meant that in future, Treasury would be able to demonstrate to Parliament what municipalities did with the equitable share. Currently municipalities used it to pay creditors, because they did not collect their revenue.

Ms Ulrike Britton, Chief Director: Urban Development Infrastructure, National Treasury, said provinces would determine which programmes would be prioritised in using the Human Settlement Development Grant. The grant already catered for provinces to decide how they wanted to implement the Minister’s announcement.  Therefore, the funding could be provided for those types of initiatives. 

On the outcomes of the budget forum lekgotla, Ms Pakkies said the first lekgotla dealt with political matters such as political leadership, political risk and the interface with administration. The second lekgotla looked at functional arrangements and the fiscal framework and was held on 11 December 2020. There were some short-term tasks and activities that departments were tasked to do. The third lekgotla, which was being prepared for, would look at infrastructure and how it should be funded and asset management and maintenance issues.

On the local government equitable share and the variables, she said these were explained in an annexure.

Mr Marumo Maake, Director: Provincial Budget Analysis, National Treasury, spoke on the R28 billion that was added to the health sector for Covid-19. He said there was a need for health workers to have the tools of the trade, such as masks and personal protective equipment (PPE), taking into account the second and possible third and fourth waves of the pandemic. It was unfortunate that a lot of things had happened around this procurement that was now in the public domain. The Office of the Chief Procurement Officer had ensured that the names of companies awarded contracts for PPE were now in the public domain to make the process as transparent as possible.

On whether there was a move to centralise conditional grants, Ms Fanoe said the answer was no. On the R8 billion allocated to Covid-19 through the PES, she said this was made available to provinces directly, to deal with expenditure directly related to the current second wave and other subsequent waves. Funds had been made available to deal with the vaccination rollout by means of a direct grant through the HIV grant. However, the purchasing of vaccines was centralised, as there was a worldwide scarcity of vaccines.

On how many conditional and direct grants there were for emerging farmers and for agriculture, she said there were three direct grants available where money went directly to provinces. Among them were the Comprehensive Agriculture Support Program Grant and the Ilima/ Letsema Land Care Program Grant.

On the R350 SRD grant, she said this had been extended for another four months and it would continue to be managed by the national department. So, it was not a DoR issue but an appropriation issue which would come to the Committee.

Further questions

Mr J Mpisi (ANC – Chairperson of the Gauteng Legislature Committee on Finance and e- Government) said he thought Mr Hattingh would give the reasons for the non-collection of revenues by municipalities. He said some municipalities, in the areas in which they operated, did not have the capacity to collect revenue or there were economic challenges in these municipalities. What advice would Treasury give the provinces to assist in the collection of these revenues?

On the issue of provincial grants, he said his province was pushing that the grants given to provinces be used for the purposes intended. The question was whether provinces that were not using these grants should continue to be given them.

Mr Ryder said there should be no excuses for billing uncollectable debt. Municipalities needed good indigency policies in place so that the right people were billed, not people who could not pay.

He requested the link for Treasury’s equitable share website details.

In response to Ms Fanoe’s comment on the centralisation of the purchase of vaccines, he said her comments made it more obvious to him that provinces should be permitted to procure their own vaccines for the safety and security of the population.

The Chairperson said the procurement of vaccines was related to the Department of. Health and the centralisation of procurement were to curb corruption.

Mr Mpisi said the Committee need not encourage the debate on decentralisation of vaccine procurement.

On local government’s collection of revenue, he said that conditions on the ground had created more unemployment and there was a need to find a better model for municipalities to collect revenue and to take into account the realities on the ground which forced people not to pay.

Mr Y Carrim (ANC, KZN) said that one should be guarded in provincialising what was a national and global pandemic. Vaccine producers would only supply national governments. This was the position of the manufacturers themselves. The WHO also discouraged this. In addition, there was a need to guard against some economically better off provinces benefiting by getting their own vaccines as opposed to other provinces. What you would get was people going to those provinces to get vaccines. He did not want the debate to be encouraged as it would increase inequalities within the country.

Responses

Mr Hattingh said slides 12 and 13 of the presentation were the outcomes of the budget lekgotlas. He said he would share with members of the Committee the annual State of Local Government report, as well as the report done for Parliament on municipal over and under expenditure. These reports contained extensive detail on the underlying challenges that Treasury was trying to resolve. In summary, the heart of the challenges was the issue of ownership and control.  He said property not correctly registered in the Deeds Office was a real challenge Treasury was trying to resolve with the Department of Public Works.

On the collection of legitimate revenues, the DoR was trying to deal with this through the redistributive part of the Bill which was aimed at those municipalities that did not have a strong economic base.

The integrated revenue strategy developed with the Department of Cooperative Governance and Traditional Affairs (COGTA) was the vehicle to place advisors in provincial treasuries and to help municipalities get their systems in order to properly generate billing.

Ms Fanoe emphasised that it was important for municipalities to have proper indigent registers in place. Municipalities needed to do more work in this area.

Mr Emmanuel Pillay, Director: Provincial Budget Analysis, National Treasury, spoke on provincial grant performance. He said that more than R100 billion in grants went to provinces for various sectors. Average spend performance for the past few years was around 95 to 98 percent , and the underspending was rolled over to the next financial year. There was however a disjuncture between spending and performance. Treasury was working with national departments on this disjuncture. 

The Chairperson asked for comment on funding of the National Student Financial Aid Scheme (NSFAS).

Dr Mampho Modise, Deputy Director-General: Public Finance, National Treasury, said the team responsible for appropriation would be meeting with the Committee to present on the NSFAS matters.

The meeting adjourned.