Division of Revenue Bill [B3-2021]: negotiating mandates

NCOP Appropriations

19 May 2021
Chairperson: Ms D Mahlangu (ANC)
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Meeting Summary

Each province read out their negotiating mandates for the Division of Revenue Bill [B3-2021], with the Eastern Cape abstaining and the Western Cape being the only province to vote against the Bill.

National Treasury responded to the reservations and comments made by provincial legislatures, which included concerns about the ascertainment of the equitable share and funding for local government in particular; the possibility of increasing conditional grants, the impact of COVID-19.

Committee Members were dissatisfied with Treasury’s responses, stating that this conversation is held year after year with little progress. It called for the matter on local government equitable share to be relooked at and a workable plan put forward. The 1996 White Paper on Local Government has a fundamentally flawed premise when it argued that local government raised 95% of its own revenue; in 2021 who believed that? Reallocation of funds due to underspending was another concern as well as compensation of employees. It asked Treasury to submit a consolidated report on the recommendations of provinces and the comments by the Committee by Monday 24 May 2021.

Meeting report

Negotiating Mandates on Division of Revenue Bill [B3-2021]
The Chairperson noted that there are 40 by-elections throughout the country today. She welcomed Members and special delegates from the provinces. After the nine provinces table their negotiating mandates on the Division of Revenue Bill, National Treasury and the Parliamentary Budget Office (PBO) would be given an opportunity to comment on the mandates. However, the Committee will still expect Treasury to submit formal written responses as usual which it will send to provinces for their consideration when they are processing their final mandate.

North West
Mr S Du Toit (FF+, North West) thanked the Chairperson saying that, as the Members could hear, he was in transit as he was busy with by-elections, which is also a priority. However, he had been asked to present the negotiating mandate for the North West. The province had a number of recommendations, which he proceeded to highlight page-by-page (see mandate). He concluded that the province supported the Bill with the proposed amendments.

The Chairperson asked Free State to proceed but the Committee Secretary asked if it could begin with the Eastern Cape because the Committee was struggling to connect with the Free State.

Eastern Cape
Mr Z Mkiva (ANC, Eastern Cape) had the mandate which was signed on 18 May 2021 and the legislature, mandated him as the permanent delegate in the National Council of Provinces (NCOP) to abstain from offering a view on the Bill due to the following challenges experienced during the consideration of the Bill:
(a) restriction by the Legislature’s curtailment of physical public hearings due to the Covid-19 pandemic;
(b) solicitation of inputs via email and other media outlets did not yield any results.

Free State
Mr E Njadu (ANC, Western Cape) said he was presenting the negotiating mandate on behalf of the Portfolio Committee on Finance for the Free State and standing in for Mr Moletsane. The deliberations and the vote of the legislature was on 4 May 2021. The Portfolio Committee on Public Accounts and Finance raised a number of concerns but voted in favour of the Bill.

Mr D Ryder (DA, Gauteng) said that the Gauteng Provincial Legislature met as a committee and the date of the deliberation was 14 May 2021. He highlighted the recommendations made. The Finance Portfolio Committee supported the principle and detail of the Bill and authorised the provincial NCOP permanent delegate to vote in favour of the Bill.

Mr Y Carrim (ANC, KwaZulu-Natal) said the KZN Portfolio Committee on Finance met on 12 May 2021 and agreed to mandate the KwaZulu-Natal delegation to support the Bill.

Ms M Mamaregane (ANC, Limpopo) read that the Committee sat on 18 May 2021 and gave a negotiating mandate to the NCOP permanent delegate to negotiate in favour of the Bill with recommendations.

Ms D Mahlangu (ANC, Mpumalanga) read that the Portfolio Committee on the Premier’s Office; Finance, Economic Development and Tourism supports the Bill and that it conferred the mandate on the Mpumalanga permanent delegate in the NCOP to vote in favour of the Bill, without any proposed amendments.

Northern Cape
Mr S Aucamp (DA, Northern Cape) wanted to begin by thanking Northern Cape Legislature Chairperson of Portfolio Committee: Finance, Economic Development and Tourism Mr Neo Maneng for his presence. As the Committee will remember in the past there were some complaints as he was not invited. This year the Committee ensured invitations were extended and he was present so he wanted to thank him. The Committee sat on Monday 17 May and the Division of Revenue Bill was discussed. The legislature voted in favour of the Bill subject to the serious consideration of the proposed amendments.

Western Cape
Mr Njadu (ANC, Western Cape) said that the reasons for the Western Cape negotiating mandate are included in the attached Committee report. The Committee deliberated on 18 May 2021 and the vote of the Western Cape legislature was as follows: The Budget Committee having considered the subject of the Division of Revenue Bill referred to it in accordance with Standing Rule 217, confers on the Western Cape delegation in the NCOP the authority to not support the Bill.

The Chairperson asked if the reasons were provided.

Mr Njadu confirmed that he had mentioned that the reasons were enclosed in the attached report.

The Chairperson thanked him. The process is now that Treasury and PBO will comment because the Committee still needs to refer the Bill back to the provinces for final mandates after Treasury has considered the recommendations and concerns raised by provinces and the conditions of their support or non-support.

National Treasury preliminary responses
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning at National Treasury, asked when the Committee would like its written responses. She asked for as much time as possible as there were a number of recommendations and it required a bit of time to prepare those responses. It would be guided by the Committee on when these written responses were required. Treasury had picked up on a number of key themes that came across. She was joined by Mr Jan Hattingh, responsible for local government budget monitoring and analysis, and Ms Ogalaletseng Gaarekwe, responsible for provincial budget analysis. They would assist in the responses.

Local government equitable share
This issue came up quite a lot. The recommendation was made that COVID-19 expenditure in municipalities should be monitored. She asked Mr Jan Hattingh to touch on this because Treasury does have a monitoring system in place for this. What might be useful would be to have an opportunity to present the local government equitable share to the Committee and to explain how the formula works as well as the provincial equitable share formula. Both formulae are not only population based but take into account factors such as the need for services. It would be good for Treasury to have an opportunity to present on that in the future.

Increase of conditional grants
Division of revenue is split within the approved framework. This means if there is an application to increase funds, the same application should indicate where there should be a decrease in funds. This becomes tricky as all nine provinces need to agree to the changes. The reason the conditional grants cannot be increased is because of the constrained fiscal environment. We all agree that that would be great, but there is a fiscal constraint and, in the end, if debt runs out of control, it means that there will be no money left over for expenditure. Ms Gaarekwe will highlight the issue and particularly what has been done in assisting provinces with budgeting and, in particular, the reduced compensation of employees (COE) budget.

Ms Ogalaletseng Gaarekwe, Chief Director: Provincial Budget Analysis at National Treasury, explained that Treasury was currently busy with the analysis of provincial COE as it accounts for more than 60% of the provincial budget. It was trying to work with provincial treasuries and the executive committees of each province to give them options. It will take a decision as to what it will implement, but at this stage it expects to start the analysis from June and by the end of August the project should have ended.

This is what it would be busy with, however even with other sectors such as education; as Members knew that the biggest cuts went to Education, meaning that there is a lot of work to be done in this space with the Department of Basic Education, provincial departments of education and the provincial treasuries. As there is a lot of work to be done, most of the work in this financial year will be on COE to ensure that it comes up with options to assist provinces to stay within budget since it knows how deep the cuts are. In response to the budget cuts raised by the Northern Cape, Treasury wants Members to know that the cuts were proportional, as per its share of the equitable share. It was not the case that some provinces more cuts that others; it was proportional.

Previously, provinces received funds for drought in particular. Treasury would follow up with the Department of Agriculture to get a sense of whether provinces would be getting this year.

COVID-19 impact and spending
Mr Jan Hattingh, National Treasury Chief Director: Local Government Budget Analysis,  addressed two concerns. First, COVID-19 obviously has a severe impact on the revenue of all municipalities. It is in this context that R20 billion was allocated as part of the budget with R11 billion as part of the equitable share and R9 billion in the form of the repurposing of grants the NCOP approved. Treasury has been tracking the expenditure side of COVID-19 spending since its inception using a weekly monitoring system. Unfortunately, it is a manual process and is not a verified process. In addition, it formally publishes the financial results as well as the grant performance as part of the quarterly Local Government Section 71 Report and this has been done for 12 consecutive years. All this information is on the Treasury website; however, in addition, it has introduced a special COVID-19 report, which the Members can have access to if they would like. The third quarter results for the current municipal financial year will be published before 31 May 2021, including the COVID-19 spending report as formally reported by municipalities.

Reallocation of funds due to underspending
The monitoring system has the sector departments responsible for policy monitoring. Treasury is responsible for the financial monitoring, but it has also been working with provinces and municipalities for a number of years to ensure that as part of the reallocation process, that the Division of Revenue Bill and the Act allows, that provinces do not necessarily lose money to the National Revenue Fund. If municipalities perform better relative to others, then Treasury can stop and reallocate; but there is a process that it has tried to institutionalise so that a province does not lose money. As such, it would rather transfer money to a district or local area that has capacity to manage it. This process is institutionalised and it worked to the benefit of the provinces. Progressively then, if one looks at the numbers, one sees that surrendering back to the revenue fund is not as radical as it was before – due to the practice that the NCOP has guided it to implement. Given the overarching challenges of COVID-19, it saw last year and is seeing this year, an impact on the ability to perform above normal thresholds given supply chain related challenges.

Ms Fanoe said if anything had been left out, it could be dealt with if requested by a Committee Member. She asked to be guided on when the Committee wanted the written response on the mandates.

The Chairperson said she wanted to give Members a chance to comment on the Treasury response, but not to have open discussion on the mandates as Treasury still needed to deal with the concerns raised by the provinces and send the Committee a consolidated report. Before Members comment, she offered the Parliamentary Budget Office a chance to comment. However, the PBO had nothing to add. She proposed that Treasury send the consolidated responses to the Committee Secretariat by Monday 10 o'clock so that it can forward it to the provinces for them to consider their final mandates. She asked for Members to comment on what Treasury has said.

Comments on Treasury response
Mr Ryder said that it feels like every year the Committee comes together and goes through this process and every year, it seems to be reading cut and paste portions from the previous year. This is not because it is cut and paste portions, but rather, because the issues are not being dealt with. Specifically, he wanted to speak about equitable share and its allocation. Every year Treasury comes and says that there is a complex formula for calculating the equitable share. Every year the Committee asks Treasury to go and talk to the provinces and local government; have its budget lekgotla and then hopes that everyone is a little bit more satisfied and informed when they come back. When the Committee returns the following year, it has exactly the same complaints. He was not sure if people understood what Treasury was presenting to them at the budget lekgotla, and he was not sure if Treasury had good engagements at the budget lekgotla and included the right people at that lekgotla. He was not sure if the Committee recalled that he had previously suggested that the Committee be allowed to observe if not to participate, so that it can see that issues are being properly dealt with and discussed because this is its role. Its role is to be the meat in the sandwich between local, provincial and national government.

Every year Members report that everyone is unhappy with the equitable share and that no one feels that the equitable share is dealing with the right issues. It has become most important now, with COVID-19 and government lockdowns having dropped the collection rate right down for municipalities. The reason given every year by Treasury for only allocating 9% of the fiscus to local government is because local government has mechanisms to collect its own revenue. The point has been well demonstrated by South African Local Government Association (SALGA) and by what is seen on the streets and in the newspapers, that municipalities are really struggling to collect revenue. They are also spending badly - there is no argument there - but the fact is that every time the Committee sits, it comes with the same problems.

Committee Members must be empowered to inform its provincial legislatures and local governments that issues have been dealt with properly; and he did not feel that he could take this position, because he does not know what Treasury has done to inform provinces and local government properly, to negotiate and explain these things. This is the reality and whilst all understood that there was a shrinking fiscus and that there is pressure, local government is where service delivery really happens and equitable share is something that is really meant to take care of the poorest of the poor. He accepts that the rich suburbs can pay and they must pay, but equitable share is there to ensure that everyone has basic access to services such as water, electricity and so on.

The Committee needs to be comfortable with the equitable share, and at the moment, he was not; because the Committee sits in the same situation every year when it discusses it. He was unhappy with how equitable share was being pushed out by Treasury and as Members, they are not sure that there is an adequate understanding of it on both sides of the coin. He thought Treasury had space to move off of their position. He also believed that local government should be taking more accountability for how it spends money. However, there is a real need to sit down and have a frank discussion with the right people at the table.

Mr Carrim said he partly agreed with Mr Ryder. The matter was first raised in 1998/99 and fairly often since but there has not been much progress. At that time, the equitable share was 5 or 6% and now it is about 9%. The issue was also raised that the White Paper has a fundamentally flawed premise. It sort of argues that local government raised 95% of its own revenue; which is a lot of utter nonsense. It may have been understandable if that was argued in a 1996 White Paper, but in 2021 who believed that? If he was correct, the White Paper did not take sufficient account of the expanded number of people in a municipality amalgamating a fragmented society. Secondly, through the Constitution and legislation, local government has far more expanded powers and was doing more than it did during the Apartheid era. Thirdly, though the Constitution spells out the powers and functions of provincial and local government, there have been lots of unfunded mandates. He thought this had decreased over the years, but was still present. Local government sometimes does the powers and functions or the responsibilities of provincial government, but it does not have the funding transferred to it. There is a huge variety of capacity to raise revenue, partly based on constituencies one is representing and the levels of poverty in the area.

The Committee cannot go on like this, and Mr Ryder was right in saying something must be done. The Committee cannot alone tackle it and it may have to engage vigorously with its partners in the National Assembly although, strictly speaking, the equitable share is primarily an NCOP concern. The issues are very complex and municipalities also bring upon themselves their own difficulties by not spending money effectively and productively. This also happens in national and provincial settings. It is a big issue and he thought more work needed to be done including by the PBO on this as has been requested before and then decide on a course of action.

It does mean combined action, both Houses, the Department of Cooperative Governance and Traditional Affairs (COGTA) and importantly, SALGA. As COVID-19 hopefully recedes, the Committee needs to be on the streets, including Members of Parliament. Nothing says that Members should only sit here and talk. It should have some sort of direct action. He did not know what it is, what the decorum is and the rules and norms are, but as ANC members, nothing stops himself and the Chairperson from being out there as ANC members, though people might make fun that they are marching against themselves. So be it, at least it is also civil society and not just politicians. Treasury has its own challenges and with COVID-19, even more. At the same time, something needs to be done and everyone has to give and take, including the national and provincial departments. He thought Mr Ryder was right on one level, but the answers are far more complex than maybe the both of them thought they were.

Mr Njadu said that his observation of the negotiating mandates from provinces were the three key issues he had highlighted as central to service delivery moving forward. However, he did not know where to bring in the point of the reallocation of funds. Either the Committee should deal with the matter before the provinces or after the provinces have discussed the matter. He wondered where it should be brought in. The non-spending of conditional grants is also a key concern. Funds are reallocated but are not used or not used efficiently, whilst there are areas where funds could be used more efficiently. He asked when this could be discussed going forward due to the outcry from the provinces about when Treasury is making allocations. He asked how the Committee as part of its oversight, can ensure that these concerns are not overlooked and the Committee does not continue to have an outcry from provinces about this.

The Chairperson said she understood the Members' frustrations. As expected, this Committee was present when the Bill was presented to the National Assembly Committee, and this Committee raised concerns. The Treasury team tried to explain and it was really frustrating because the concerns always come back to the Select Committee on Appropriations. The question is then whether Select Committee intends to utilise its powers without abusing them. She said that Committee Members should come up with recommendations or proposals as to how it can intervene and assist. The concerns raised by Members now were raised by Members in the workshop it had where it had participants from the provinces and local government. It was frustrating. It needed Treasury to understand what the problem is and why it has to complain about the same matter each time and whether this complaint about is fixable or not so that there is a uniform understanding at all levels. She asked Members to speak to the Monday 24 May at 10 o'clock given to Treasury for its consolidated responses on the matters raised.

The Committee accepted the timeframe and adopted the 12 and 17 March 2021 minutes.

The Chairperson thanked Members for their time. She understood that Members had other commitments owing to the by-elections and other committees which they needed to attend to as well as political responsibilities. She requested that as Members are present on the ground for by-elections and other responsibilities that they take care. For those who are fortunate enough to be 60 years old and above, she asked that they get vaccinated to encourage community members who qualify for vaccination.

The meeting was adjourned.

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