Division of Revenue Bill: briefings by Financial and Fiscal Commission (FFC) and Parliamentary Budget Office (PBO)

Meeting report

The Chairperson said she appreciated the support of the Members after losing a parent. Their messages meant a lot to her.

She welcomed the representatives of the Financial and Fiscal Commission (FFC) and Parliamentary Budget Office (PBO), fellow Members of the Committee and the officials and guests present.

She asked that Members introduce themselves, if and when they speak, in order for Members to know each other. There had been changes in provincial representation on finance. 

The Chairperson said that Section 76 bills should be dealt with in a manner to ensure that provinces have sufficient time to consider the bill and confer negotiating and final mandates. She said this has been a complaint from the Members themselves. Hopefully, this time around, there would enough opportunity as provinces to deal with and process the mandates. Importantly, in terms of NCOP rule 240.2, a six week period must be observed when processing such a bill. That week was the second week of the six week cycle. In the third and fourth week, there would be a briefing by the SA Local Government Association (SALGA) and public hearings. The fifth week will be conceding and negotiating mandates and the sixth week will be processing final mandates and adopting reports. 
 
She said there would be a briefing by the FFC and the PBO on the Division of Revenue Bill, to inform the Committee what has been considered with this bill. She thanked the members for handling the previous meeting with such professionalism.

[Readers should consult the documents distributed by FFC and PBO, available on the PMG web page]

Financial and Fiscal Commission (FFC) 
Mr Chen Tseng, Head of Research, FFC, said that, considering the 2021 division of revenue, and expenditure defrayed from the national revenue fund, the total national appropriation by vote reduced by R2.3 billion in the 2021 Budget. [See slide 5 of the presentation]. Provincial equitable share and conditional grants were adjusted downward by R50.3 billion and R2.2 billion respectively, in comparison with the 2020 Division of Revenue. Local government equitable share, conditional grants and general fuel levy declined by R4.3 billion in total. In comparison to these, revenue shortfall for the 2021/22 financial year is estimated at R132.6 billion between the 2020 and 2021 budgets. The point he said he was trying to make was that ‘the size of the pie is shrinking’.

Mr Eddie Rakabe, Programme Manager: Fiscal Policy Unit, FFC, said the Commission welcomed the R10 billion allocation to deal with provincial Covid-19 interventions. This is supplemented by the R6.5 billion two-year allocation for vaccination procurement to the National Health Department. An estimated R9 billion could be drawn on from the contingency reserve and emergency allocations. The Commission called for a better alignment of responsibilities between the spheres of government and for well-synchronised implementation. It is of concern that the vaccination allocation may be incompatible with government’s goal of achieving herd immunity within a 12 month period. 

In its overview of provincial government allocation, the Commission said that the 2021 Budget makes provision for a total of R1.5 trillion and R356 billion in provincial equitable share (PES) and provincial conditional grant allocations, respectively, over the 2020/21 Medium Term Expenditure Framework (MTEF) period. The total conditional grants for provinces for the 2021/22 financial year amount to R115 billion, increasing from R110 billion in the previous financial year. 

Regarding local government, the share of local government allocations rises over the MTEF from 9% in 2021/22 to 9.7% in 2023/24. Total local government transfers will decline by 2% over the MTEF as part of the fiscal consolidation measures - R15.5 billion from the local government equitable share allocation, R2.7 billion from the General fuel levy and R2 billion from the conditional grants

The Commission noted the fiscal policy stance consistency in the 2021 Budget. Achieving both economic reform and managing government’s debt simultaneously was a difficult balancing act. The Commission was concerned that sight may be lost of the Constitutional imperatives. As the government is negotiating for a sustainable fiscal path, it should not lead to the retrogression of the socio-economic conditions of South Africa’s citizens. 

Parliamentary Budget Office (PBO)
Dr Dumisani Jantjies, Director: PBO and Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, took the Committee through the presentation.

Its purpose was to provide an analysis of the Division of Revenue Bill to assist Members with their discussions on the Bill before adoption or recommendations

The presentation focused on:
•Changes made to [budget allocations in] the 2021/22 financial year in all three spheres of government
•The change in the division of revenue over time
•Changes to the provincial equitable share
•Changes to provincial and local government conditional grants
•It also provided statistical information emphasizing the need for improving services on a provincial and local government level

Dr Orlandi said the Covid-19 pandemic has worsened already high levels of poverty in SA There was slow progress in dealing with service delivery backlogs and division of revenue allocations before the pandemic did not significantly reduce poverty. Even before the pandemic there was slow progress in dealing with large service delivery backlogs and poor provision of services

There was improvement in provincial and local government social and economic development indicators over the last 10 years up to 2019. But despite the progress, there was already regress in some indicators, e.g. decline in number of households with access to piped water. The Covid-19 pandemic has erased some of the service delivery gains achieved in the past decade, and continues to put more pressure on government service delivery by both provincial and local government. Government intends to consistently decrease coverage of basic services components of the local government equitable share (LGES) that critically provides for free basic services to indigent households over the MTEF. It is clear that the division of revenue did not turn out as might have been envisaged a few years ago. Covid-19 and its effects on the economy, fiscus and society led to reprioritization of spending.

Dr Orlandi said several initiatives are in progress to improve socioeconomic development indicators. These include the review of the PES formula, including:
• Developing options to take account of costs associated with living in a rural location.
• To revise and update the risk-adjusted factor of the health component.
• To develop options on how to account for different funding needs of different types of schools and learners.

Many municipalities struggle to balance their revenues with their expenditure responsibilities. A proposal is on the table to review the structure of the local government fiscal framework and to agree on which issues in local government are attributable to the structure of the fiscal framework and which are related to other factors such as problems in governance, intergovernmental relations and the assignment of functions between spheres. There is further need to ensure that there are adequate skills and capacity to implement budgets by government and municipalities, and that governance measures function according to legislation.

Discussion
The Chairperson was no longer part of the meeting due to connectivity issues, so while she tried to reconnect, Mr E Njandu (ANC, Western Cape) took over as acting Chairperson. He offered Members the opportunity to ask questions.

Mr M Moletsane (EFF, Free State) said that as resources will be distributed to provinces and local governments through this equitable share, it is important to ensure it serves the people. One question that is vital, is [whether] this government is able to fight corruption? If so, how many provincial officials have been sent to prison due to corruption as a sign of eradicating corruption?

Mr Z Mkiva (ANC, Eastern Cape) said that he appreciated the presentation and asked if the presenters could perhaps help the Committee understand, what is the one thing that makes this year’s budget different from the previous year, except for the fact that there are shortfalls. And what interventions are there to ensure there are higher levels of efficiency to ensure progress moving ahead? 

Mr D Ryder (DA, Gauteng) commented on the local government divisional revenues, especially after seeing there was not much movement away from the 9% share of local government in total allocations [over the MTEF, from 2021/2 to 2023/4]. With the allocation staying pretty much where it is, appreciating the fact that there are adjustments to the equitable share and the conditional grants, there continues to be Eskom debt and debt to Rand Water and other water authorities increasing and not being managed correctly. As a result, there is the problem of constitutional obligations not being fulfilled by municipalities. Using Emfuleni Local Municipality as an example, where people have had their water cut, and there does not seem to be any kind of support or input from Treasury to resolve this. The legacy debt that some municipalities are dealing with is massive. Mr Ryder asked for comment on dealing with that legacy debt and on the upcoming municipal elections, where newly elected local governments are going to inherit this problem that is not of their own making. Are there any discussions from Treasury in terms of dealing with municipalities that have to deal with debt?

A second question related to grants, and the move from direct to indirect grants, where Treasury and national departments seemed to be taking a bigger role in terms of handling the spending and the procurement side of things, and provinces having less autonomy. It gives [provincial] government less control, but does not allow for local content. Was there any input from FFC and PBO on these issues?

The Chairperson returned to the meeting and, after an update from Mr Njandu, she asked the FFC about the issue of the public wages that is not resolved. If it is not resolved, it is going to affect the provinces. What is the extent of this effect?

The FFC spoke about the rollovers that must be expected. This Committee once had a deliberation on the non-expenditure or slow expenditure on grants. So this might be the cause. If not, can the FFC please advise on this because it is unacceptable if service delivery is needed on the ground level, but still there is slow progress on expenditure.

The PBO reported that the public transport network grant reduces by R1.3 billion over the MTEF. There had been complaints and concerns raised with the Committee, and recommendations have been made in reports in as far as this reduction in public transport was concerned. The Chairperson asked who is going to be more effected by this reduction. Because the poor and the working class are the ones who are reliant on this. If there is a compromised mode of transport for the poor, the economic recovery under level one lockdown will not be realised. What is the thinking behind PBO in terms of this? If FFC would like to tap into this too, they should please engage in the discussion.

Responses
Prof Aubrey Mokadi, Commissioner, FFC, responded to the question of Mr Moletsane on corruption. The FFC recommendation is that the government needs to be decisive and have a coherent strategy as well as political will. Although this may be a one liner, it was informed by a deeper discussion on a deeper recognition of the state of affairs through the three tiers [sic] of government with regard to corruption. There is knowledge of the general processes in place to deal with it, but the overall impression from the citizenry is that nothing is being done. In adapting fiscal policy to respond to this, a reversal of public entities and local government financial and operational positions [is needed]. [The problems] are caused by maladministration and governance failures through financial mismanagement and corruption. There is also the realisation that it is necessary to develop another front in dealing with corruption, to provide additional capacity in terms of leadership through the three tiers of government. FFC has embarked on a research to adapt and suggest those adaptations on leadership that could have a bearing on government. As soon as the research is finalised, there is hope that it can be an addition to helping with this. 

With regard to a broader coherent strategy, the FFC also realises that the shortcomings from reductions in Early Childhood Development (ECD) and the National Student Financial Aid Scheme (NSFAS) eventually has a cumulative effect of marginalising many others. This also puts a strain on social funding. There is need for a proper coherent strategy to deal with this rather than an individual issue where someone commits a crime and goes to jail. There has to be a shifting of social consciousness in people and how citizenry responds and takes issue for their civic issues.

Ms Elizabeth Rockman, Commissioner, FFC responded to the issue of outstanding debt owing to Eskom and the water boards. This is a legacy issue that future mayors will be dealing with for a number of years. There is knowledge that the Department Cooperative Governance and Traditional Affairs (CoGTA), national and provincial treasuries are dealing with this issue. There are task teams established. It is a very complex problem to both Eskom and the water boards. It needs to be broken down into the various components to address the three basic services linked to indigent registers to be more credible, so that budget provision and projections, and ultimately expenditure, goes to where it is intended. The other issue is that the tariff settings of municipalities are not entirely realistic when it comes to water and electricity. There is a lot of capacity building that needs to take place and more urgency needs to be put on municipalities to meet their commitments to Eskom and the water boards. In instances where payment plans have been drawn up, it is often found that municipalities do not subscribe to payment plans that that were agreed to. Usually, because they were under so much pressure to get a payment plan approved and signed, it is not realistically reflective of the revenue they are able to generate. A major problem related to Eskom debt is that the areas they supply directly, the municipality has no control to cut off electricity and look at metering, and this contributes to this problem. There needs to be an update with respect to the Eskom debt and the water boards, to get a more realistic plan in place to enable municipalities to catch up with their debt. Also, to enable Eskom and the water boards to approve their financial position. 

Mr Trevor Fowler, Commissioner, FFC, responded to the example of the Emfuleni case, where debt is not the only issue that needs to be addressed. The key issue is that in the last 20 years, the economy has declined massively because of the privatisation of the Iscor plant, which once employed 40 000 people, and now employs 2 500. It is important that there is also an economic intervention. There are a number of initiatives available, but funds are required. That was one of the key issues that need to be addressed. Another issue was the public transport grant. Statistics from most parts of the country show that that the poor, captured in townships, spend most of their income on transport and food. So a cut in the transport grant to change the way transport works will impact the poor the most. The alternative approach to the cut is to change the way the transport grant is now being spent. Currently it is being spent in many large cities on rapid transport systems, which unfortunately have very expensive infrastructure. Cheaper infrastructure could be used, which could serve the same purpose – not having expensive stations and more effective, cheaper ones that serve the same purpose. This could be one of the key recommendations made. In support of Mr Mokadi, Mr Fowler said the key issue around corruption is a national campaign. International experience has shown that the only way address this is a national campaign. Single interventions, imprisoning individuals, only sends a message to a degree, but a campaign raises the consciousness of the country and impacts all spheres of government.

Dr Jantjies said that adding to what the FFC had said, the 2021 budget does allocate more money to fight corruption. The Committee can monitor or assess the process to ensure that things are being implemented to deal with poor governance. 

The 2021 budget shows that actually revenue has performed better than what was expected. This requires a lot of monitoring in the implementation of recovery plans. The presentation said that there are a lot of conversations about the fiscal framework and how this affects the local government sector and if there is a need to make adjustments. One of the common challenges faced by local government is the inadequacy of accountability measures and the lack of skilled personnel to implement service delivery plans and realise those service delivery plans. More needs to be done about the issue of ensuring proper accountability mechanisms in local government, the issue of failure to monitor public finances throughout the budget cycle, and the issue of public transport. Studies show that the majority of South Africans rely on taxis which do not benefit from public finance [i.e. taxis are not subsidised].

Dr Orlandi responded to the question of Mr Mkiva on an overall picture of the budget. The 2021 Budget has reprioritised a lot of the compensation funds, and reduced compensation throughout all the function groups because funds had to be reprioritised towards Eskom. R31.7 billion was allocated towards Eskom. Provincial equitable shares have been reduced by R27 billion. One example in terms of police, the police compensation was reduced by R11 billion in 2021/22. But on the other hand, when looking at the structure of the compensation of employees in police, there are still a lot of high level positions. So when looking at the overall picture of how the compensation is structured, it is not that lower levels are increased and higher ones are decreased. The PBO does not agree that the police budget has been decreased but there is not really knowledge how the police has restructured their compensation of employees’ (COE) budget

In response to Mr Ryder’s question, although some of the budgets have been decreased, there has also been a slowdown in spending in the current financial year. It is also a matter of implementation. Something that relates to this; the PBO is currently busy with an analysis of conditional grants, and it is frightening to see the duplication of grants in terms of outputs. There are a lot of things that contribute to not spending, or not seeing the impact. In terms of the movement of direct to indirect grants; there is little conviction that is the ideal indication, when taking the example of Health. With the National Health Insurance (NHI), the indirect proportion has not been spent and national government has seen they could not appoint any General Practitioners (GPs) for NHI purposes, so that function has now been allocated to provinces. 

In terms of public transport, this was reduced by 31.9% in the 2020 financial year [PBO slide 25]. That money has been given back in 2021 because the grant increased by 44.8%. There needs to be assurance that the grant has been implemented and its function is achieved. As the FFC commented, the desire to provide expensive infrastructure is perhaps the whole stumbling block in implementation of this grant.

Dr Seeraj Mohamed, the PBO Deputy Director, commented on dealing with the legacy of debt in municipalities. In local government, the equitable share meant for services is declining. What needs to be taken into account is that the pace of new household growth has outpaced the rate of population growth, and the country is now sitting with 17 million households. It is going to become harder for people to make debt payments, and debt may increase. There does not seem to be a clear plan in dealing with this. The decline in provision for basic services is going to affect the standard of living and affordability and add to the legacy of debt.

On the second issue of corruption, Dr Mohamed said he agreed with Mr Fowler – we do need a national campaign. Corruption however, tends to be defined as a problem of government, but it is also problem in the private sector. White collar crime within the private sector is also very high. The other thing that needs to be taken into account when thinking about corruption is the structure of the national economy, with value chains and so forth. Corruption is linked with people trying to break into value chains from both the private and public sector where people see opportunities to enrich themselves. There needs to be thought about the drivers of corruption.

Mr Njandu took over as acting chair once again after the Chairperson could no longer participate because of connectivity issues

The Committee approved the minutes from previous meetings.

The meeting was adjourned.