In this virtual meeting, the Select Committee on Appropriations (National Council of Provinces) was briefed by the Financial and Fiscal Commission (FFC) on its submission on the 2022/23 Division of Revenue.
The Committee was told that the shock of the pandemic led to a tremendous deterioration of the Gross Domestic Product (GDP); the effect of the pandemic was pronounced for the labour market as unemployment increases. The pandemic and imposition of the nationwide lockdown triggered the most significant recession in South Africa’s economic history. The number of fiscal leakages in the system will not allow the economy to grow; the pandemic has exposed many gaps and inadequacies in the local government fiscal framework relating to expenditure, municipalities’ revenue pressures and the connection between consumers paying municipalities and municipalities’ ability to pay their creditors.
During COVID-19, gender inequality and gender-based violence have intensified; the Commission looked at the budget as an instrument that can be used to promote gender equality. The Commission also assessed the budgets of certain departments that it thought have the potential to promote gender equality and gender mainstreaming. The South African grant system is progressive; food insecurity was exacerbated by the pandemic, but the current social grants have reduced the incidence of household food insecurity by almost 80%. Access to water during COVID-19 decreased by two percent. The persistence of section 139 interventions raised questions for the effectiveness of the oversight and support framework; there has been a lack of intergovernmental coordination due to poor consultation with stakeholders; there is also a lack of consequence management.
The Commission recommended that there be an alignment of the Economic Reconstruction and Recovery Plan (ERRP) between the three spheres of government; provinces and the Minister of Finance should eliminate fiscal leakages in the system; the Minister of Finance should enhance the consistency and coherency of the Department’s key performance indicators to their financial commitments. The wage bill should be reviewed, and local government should enhance its own revenue and attract investments without looking to national and provincial government. The Department of Cooperative Governance and Traditional Affairs, and the South African Local Government Association (SALGA) should ensure that municipalities pass credible budgets; the Department of Women, Youth and People with Disabilities should spearhead the mainstreaming of gender budgeting across the entire scope of the budgeting process whether national, provincial or local. The efficacy of the social grants system should be monitored, and there should be an investigation into the inadvertent exclusion of eligible grant recipients. The Minister of Finance should ensure that water and sanitation projects also form part of the stimulus package and, along with the Minister of Water and Sanitation, and municipalities, develop strategies that de-risk private sector water investments. There should be a disproportionate view for providing assisting to poorer municipalities; compliance with legislation and policy frameworks should be enforced and consequence management should be incentivised.
The Committee asked about the ‘equitable threat’ for local government; clarity on the Commission’s use of the term ‘fiscal leakages’; whether the Commission saw focusing on local economic development as the best idea. Members also asked about the municipalities’ credible budgets and incentivising good governance and good spending; citizens’ dependency on social grants; access to water during the pandemic; steps municipalities should take to improve to collect their revenue and pay their creditors; whether the Commission has looked at the impact of the social unrest and whether it has considered sustainable programmes to remove citizen dependency on social grants.
The Chairperson welcomed all present, to the virtual meeting. He was Acting Chairperson because he had received a call from Ms Mahlangu. She had mandated him to chair the meeting, as she was unable to due to ill health.
He asked the Committee Secretary for a roll call of all Members present.
Mr Lubabalo Nodada, Committee Secretariat, replied that all Members were present but there was an apology from Mr Z Mkiva (ANC). There are also Members from provincial legislatures present.
The Chairperson asked for Members from the provincial legislature to introduce themselves.
The Chairperson went through the agenda. The purpose of the meeting was for the Financial and Fiscal Commission (FFC) to present its submission on the 2022/23 Division of Revenue.
The FFC was invited to begin their presentation.
Briefing by the Financial and Fiscal Commission (FFC)
Mr Trevor Fowler, Commissioner, FFC, said that he wanted to introduce the recently appointed FFC chairperson, Dr Nombeko Patience Mbava; her appointment has been in effect from 17 August 2021. She has a PhD in public and development management, an MBA from Stellenbosch University, and a Bachelor’s Degree in Economics from Smith College, Massachusetts, United States of America (USA). She brings a wealth of experience, which includes being a member of various boards. She has headed monitoring and evaluation units of various public entities; she has been a board member of the South African Monitoring and Evaluation Association. She is also a research fellow at the Public Monitoring and Evaluation Stellenbosch University School of Public Leadership. She also has several exemplary academic awards and achievements.
It was an honour to introduce her; the Committee knew that the previous Chairperson had passed away and the FFC has had an acting chairperson in his place for some time; there was now a formal chairperson.
The Committee Chairperson said that Dr Mbava is welcomed.
Dr Mbava appreciated the introduction and the warm welcome by the Committee. She said that she wanted to provide an opening statement before the FFC presentation.
The FFC tables its recommendations for the 2022/23 Division of Revenue against the backdrop of a very fragile economic environment, after the onset of the COVID-19 pandemic. The pandemic is causing damage to the economy and people’s livelihoods. It has posed many challenges, including the efficacy of our macro-fiscal system in accommodating pandemic-induced challenges. Existing inequalities have also been intensified and many citizens have been condemned to unemployment and poverty. This raised questions about the impact of the pandemic on the state’s fundamental obligations – the progressive realisation of citizens’ rights in the Constitution. Such questions arise because the pandemic has highlighted the shortfalls in access to basic services and food, both in terms of quantity and quality. The pandemic has heightened imbalances and conflicts in society, especially gender dimensions. It has also further exposed the limitations of the country’s oversight in accountability and leadership mechanisms.
The theme of the FFC’s submission this year is ‘the effects of COVID-19 and the changing architecture of subnational government financing in South Africa’. The FFC believed that a comprehensive and evidence-based analysis of the socio-economic impact of the pandemic was key to develop a set of informed recommendations that could contribute to turning the economy around to achieve an inclusive and sustainable growth trajectory. The FFC’s recommendations seek a recovery process that is sustainable and leaves no one behind.
The submission is divided into four sections. The first section is the macroeconomic impact of the pandemic; second is the implications of the pandemic on local government finances; third is the progressive realisation of people’s basic rights, especially their access to socio-economic rights as entrenched in the Constitution; fourth, the oversight and leadership of local government, which the FFC believes could assist local government to meet the needs of citizens and to ensure better value for money that has been spent. She handed over to the
Mr Chen Tseng, Mr Siyanda Jonas, and Ms Sasha Peters presented the FFC’s presentation.
Chapter One: Introduction
Mr Chen Tseng, Head of Research, FFC, said that he would begin with the context within which the submission has been tabled.
Growth in Gross Domestic Product (GDP)
[See graph on slide 5]
The shock of the COVID-19 pandemic was significant, with a jolt of -51.7% for GDP growth. There was a decline with annualised quarter-to-quarter change in quarter two of 2020; the country is still feeling the residual impact of that significant shock. With that shock of tremendous deterioration, there was a rebound of 67.3%. In economics, any shock whether negative or positive, at this large magnitude is never good because it creates uncertainty and risk for future shocks.
On the demand side, the FFC noticed that firms are busy restocking. There has been reopening and resuming of activities. However, that resumption is relatively marginal in comparison to pre-crisis levels.
GDP by industry
The graph on slide six shows roughly the same trend with the volatility caused.
Unemployment rate 2021: Quarter One
[See slide 7 for graph]
The mark left by the pandemic was more pronounced for the labour market. The unemployment rate, according to the unofficial, expanded definition of unemployment, is currently 43.2%.
The official unemployment rate was 32.6% but, as of two days ago (22 August 2021), the latest statistics from the Stats SA Quarterly Labour Force Survey showed that it has gone up to about 34%.
Budget deficit and gross debt to GDP
The fiscal position has deteriorated with gross debt to GDP reaching above 80%.
[see detail on slide 8]
Provincial average annual growth (2020)
Provincially average annual growth was aggregated. As a warning, the original data for GDP masks many of the idiosyncrasies of growth between the provinces during this period of the pandemic.
[see slide 9]
Number of arrivals and departures of travellers by year of travel, 2006-2020
[see slide 10]
The effect lockdown had on the tourism industry was a -70% drop-off between 2019-2020 of tourists entering South Africa. Of course, the lockdown and travel restrictions imposed negatively impacted all provinces involved. The graph shows the national picture.
Provincial unemployment rate 2021: Quarter One
The graph shows the latest figures on the unemployment rates by province. The FFC expects that, following the aggregate figure of unemployment increasing, all provinces are following that trend.
[see slide 11 for detail]
Chapter Two: Measuring the Macroeconomic and Fiscal Impacts of COVID-19 in South Africa
The COVID-19 pandemic and the imposition of the nationwide lockdown triggered the most significant recession in South Africa’s economic history. Inefficiency in public sector service provision, combined with the pandemic’s shock on the overall productivity, led to the highest levels of unemployment, poverty, and inequality.
Findings: The Macroeconomic Impact
Supply and productivity were adversely affected through mass unemployment and deficiencies in total factor productivity growth. As shown on the graph on slide 14, shocks to consumption and investment in 2020 quarter two contributed to the fall in aggregate demand. Depletions in inventory stocks and a lack of imports undermined a swift growth recovery through consumption. Both supply and demand have deteriorated substantially during this period.
Depletion in inventory stock and the long-term growth momentum, as can be predicted by the public investment private and public, have deteriorated both in the short and long term, and swift recovery of economic growth seems unlikely.
[Slide 14 has further detail]
Findings: The Financial and Fiscal Impact
The FFC also examined financial stability; the producer prices rose because of lockdowns, adversely affecting consumer purchasing power. For people, higher consumer prices affected the affordability of goods for poorer households.
The graph on slide 15 shows that the fiscal space, in terms of the primary balance, deteriorated even further with the onset of COVID-19. As a result, the fiscal impulse has been compelled towards a consolidatory stance at the end of 2020.
On revenue, there has been an increase in the concentration and dependence on personal income tax (PIT) and value-added tax (VAT) for public revenue generation, which has made fiscal revenue more vulnerable to COVID-19.
The FFC’s research also found that fiscal leakages undermined the positive spill-over effects that economic growth has on reducing the public debt burden. “We are at a stage where no matter how much money is thrown at the problem to stimulate the economy, with the number of fiscal leakages in the system, the economy will simply not grow; this is despite COVID-19.
First, there needs to be an alignment of the Economic Reconstruction and Recovery Plan (ERRP) between the three spheres of government, especially between provincial and national commitments for 2022/23.
Second, the FFC reiterates its recommendation from last year to localise product value chain and procurement for inclusive growth and job growth.
Third, the FFC encourages provinces and the Minister of Finance to eliminate fiscal leakages in the system. As shown by the FFC’s research, money is not the problem at this stage of recovery or stimulating the economy. It is rather about how things are done and how money is spent.
Chapter Three: Measuring the Effectiveness of Government Expenditure for Performance
The FFC looked at:
-The fiscal multiplier effect in economic growth and social development in South Africa;
-The alignment and effectiveness of government’s key performance indicators in representing their mandates and purposes;
-The size and shape of the wage bill;
-Programme and performance-based budgeting concerning the efficiency and effectiveness of government expenditure
The fiscal multiplier effect asks ‘R1 in, how much money out?’. The FFC found the most ambiguous outcomes in the multiplier effect in small magnitudes and that it is uncertain. This means that within a year, South Africa had a positive quantity and, in another year, a negative quantity. Negative means that for the ‘R1 in’ there are negative outcomes impacting growth and other socio-economic indicators such as poverty and unemployment.
On the key performance indicators, the FFC found no shortages of key performance indicators but there are persistent variants due to a lack of accountability.
On the wage bill, the result shows that it is larger than any other international comparators.
Research shows that the spending efficiency of the government suggests that South Africa has an 80% efficiency rate. While this may look like a good score, 80 cents on R1 cannot be celebrated without asking where the other 20 cents went.
The graph on slide 20 confirms the point about the wage bill being significantly higher than international comparators, both by developed and developing economies’ standards.
-The FFC recommends that the Minister of Finance, as the custodian of financial resources, should enhance the consistency and coherency of the Department’s key performance indicators to the financial commitments of their budgets, via the Medium-term Expenditure Framework (MTEF) Technical Guidelines. The Minister should also seek to incentivise a target that is costed, as opposed to merely indicating progress on a specific objective or simply reporting on progress.
-The Minister of Finance should review the public sector wage bill across all spheres of government with the view to reduce expenditure on non-core functions, for there is researched justification for the consolidation of the wage bill.
-The Minister of Finance should pay attention to the movement in the multiplier effect of expenditure because the economic environment is still changing due to the pandemic.
Chapter Four: Impact of the COVID-19 pandemic on the Local Economy
Mr Siyanda Jonas, Researcher: Local Government Unit, FFC, said that the pandemic has exposed many gaps and inadequacies in the local government fiscal framework. Local government was in a precarious state before the pandemic. The pandemic exacerbated the challenges of local government. Many municipalities were unable to fulfil their constitutional mandate.
Impact of Covid-19 on Municipal Expenditures
As of the end of December 2020, the local government sector had incurred close to R25 billion in Covid-19 related expenses. The COVID-19 pandemic simply increased local government expenditure. The graph on slide 24 shows that, out of these expenditures, 64% was accounted for by metro municipalities. This is not surprising. considering that metros account for 40% of South Africa’s population. Overall, there was a spending growth in all municipality categories owing to the pandemic.
Impact of Covid-19 on Municipal Own Revenues
The graph on slide 25 shows that the pandemic had a devastating impact on municipalities. The COVID-19 related revenue pressures can be seen, showing how COVID had an impact on municipal own revenues.
The green bar on the graph shows before and after COVID-19; the revenues received a hard knock across all municipal categories. However, in the metros and B1 municipalities, which represent large towns or secondary cities, there was a rebound in the second quarter. These municipalities are resilient; they owe this resilience to the diversified nature of their revenue base.
Smaller municipalities, such as rural municipalities have continued to suffer the consequences of the pandemic and their own revenue continues to decline.
Impact of Covid-19 on Municipal and Consumer Debt
Many municipalities’ revenue was affected because various consumers, namely, households, businesses, and government, were unable to pay what they owed municipalities. The graph on slide 26 shows that the flow of revenue to municipalities was lacking and, as a result, many municipalities defaulted on their payments to their creditors.
The figures on slide 26 show that the number of municipalities owing Eskom and water boards increased rapidly. For example, looking at Eskom, municipalities failing to make payments, which are greater than 40% of their operating expenditure increased from 34 in March 2020 (pre-COVID-19) to 50 during the pandemic. This large increase indicates that many municipalities indebted to their creditors attribute this to a lack of finances from their consumers. This provides a clear picture of the connection between consumers paying municipalities and municipalities being able to pay their creditors.
Municipalities should move away from the status quo and start promoting local economic development in their own spaces. Municipalities should not look at national or provincial government and should attract investment themselves by prioritising options with little or no price tags. In some of the areas, municipalities could look at are streamlining red tape, reducing timeframes for getting permits or licences, and reducing the compliance burden of their regulations. All these have the potential to attract investment.
Local government needs to enhance its own revenue. Municipalities with diversified revenue streams were able to take the shock and continue. Municipalities should explore options for additional revenue streams.
[Detail on slide 27]
-Municipalities should undertake a detailed analysis of the services they provide and align these services with their financial capabilities. The Department of Cooperative Governance and Traditional Affairs (COGTA), provincial treasuries, and the South African Local Government Association (SALGA) should ensure that organograms, staffing levels, and compensation levels are not set at levels that crowd out service delivery. Some staffing levels in municipalities are too large for municipalities and they end up crowding out service delivery.
-COGTA and SALGA should ensure that municipalities pass credible budgets; this has been a challenge because municipalities are not approving credible budgets, and this makes it difficult to implement the budget that they approve.
-Municipalities should stimulate local economic growth by creating investment-friendly conditions.
-Municipalities should consider additional revenue-enhancing strategies. The FFC has made some suggestions.
-National Treasury, through the Municipal Systems Improvement Grant (MSIG), should support municipalities to embrace e-government (digitalisation) and support them to diversify their revenue.
[Detail on slide 28]
Chapter Five: Addressing Gender Inequality through Gender Budgeting in the Public Sector
In South Africa, women bear a disproportionate burden of the triple challenges of poverty, unemployment, and inequality. During COVID-19, gender inequality and gender-based violence have intensified.
The government has committed itself to promote gender equality and it is a signatory to various international treaties on this issue. Locally, the government has come up with several legislative prescripts and policies to promote gender equality. The reality is that gender inequalities persist, and they remain high.
The FFC looked at the budget as an instrument that can be used to promote gender equality. The FFC is not advocating that women should have a separate budget but rather that gender budgeting must be mainstreamed in all spheres to promote gender equality.
The FFC assessed the budgets of government departments that the FFC thought had the potential to promote gender equality and gender mainstreaming. These departments are the Department of Basic Education; the Department of Health; the Department of Women, Youth, and Persons with Disabilities; and the Department of Justice and Constitutional Development. If these departments’ budgets could be sensitive to gender issues, they can go a long way.
[detail on slide 30]
Firstly, there is limited mainstreaming of gender issues.
Secondly, there is limited gender disaggregated data. Looking at department budgets and information, the FFC could find in other domains. Within departments, most data are not gender disaggregated. “For example, when the Department of Basic Education said that has provided bursaries, we do not learn how many girls are bursary recipients”, he added.
Thirdly, there is a lack of detailed gender-specific indicators and department reports also exclude gender issues.
[Further detail on slides 31 and 32]
There is a need for the Department of Women, Youth, and Persons with Disabilities and the Department of Planning, Monitoring and Evaluation to finalise the institutionalisation of gender-responsive budgeting, monitoring and evaluation, and auditing in their frameworks.
The FFC also recommends that National Treasury and the Department of Women, Youth, and Persons with Disabilities should spearhead the mainstreaming of gender budgeting across the entire scope of the budgeting process whether national, provincial, or local.
National Treasury should create an enabling environment to institutionalise gender-responsive budgeting.
The Department of Women, Youth, and Persons with Disabilities should spearhead initiatives for capacity building and gender budgeting as an instrument that can transform society and ensure gender equality.
The Department of Women, Youth, and Persons with Disabilities should annually prepare a report of how the division of revenue is responding to gender equality. The FFC believes it would help Parliament to exercise oversight on budget inclusiveness and the promotion of gender equality.
Lastly, StatsSA and the Department of Women, Youth, and Persons with Disabilities should provide explicit guidelines for collecting gender disaggregated data to ensure that the gap is addressed.
[See slides 33 and 34 for further detail]
Chapter Six: Testing the Means Test: Social Assistance in South Africa and COVID-19
Mr Tseng said that almost all the social grants in the country rely on a relatively simple means test targeting mechanism to determine eligibility and coverage. To an extent, the negative impacts of COVID-19 have necessitated a reconsideration of poverty and vulnerability, for which this social assistance is designed, as non-poor South Africans previously experienced severe income shocks or a permanent loss of livelihoods.
It is thus important to understand how well the existing grant system covers vulnerable South Africans, and whether the current means-testing approach ensures that the poorest receive grants with no significant leakage to those who are ineligible (or, who should not be getting). Furthermore, it is important to understand how the grant system was temporarily adjusted to reach those impacted by the pandemic, as well as how well targeted this effort has been.
[Detail on slide 36]
The graph on slide 37 shows the coverage of social assistance amongst job losers during the pandemic. Key findings are that:
-The grant system is progressive;
-The possibility of poor individuals being excluded is low;
-80% of those who lost their job in 2020 lived in a household where some form of social assistance was received;
-Therefore, an alternative targeting mechanism does not appear to be warranted.
The FFC recommends that the efficacy of social grants system continues to be monitored; there should be an investigation into the inadvertent exclusion of eligible grant recipients; there could be consideration of an asset-based system of means testing to minimise leakages and on the basic income grants; the government will have to consider the fiscal impact of this grant in the long term and perhaps intergenerational impacts of such a grant.
[Detail on slide 38]
Chapter Seven: COVID-19 and Food Security
Mr Jonas said that food security is a basic right for individuals and society at large.
Food security also came into question with the recent riots that occurred. The government has tried to increase food security by providing food parcels during this time.
[See slide 39 for further detail]
COVID-19 caused massive job losses; the FFC tried to understand the consequence this had on food security.
The FFC found that child hunger increased by 28.7%, the likelihood of households running out of money for food purchases increased by 28.5% and the recurrence of household hunger increased by 7.94%, respectively. These are staggering statistics showing that food security was at risk during this time.
The old age grants and COVID-19 grant proved more effective in protecting households against this welfare reversal. Old age grants are known to help households through different shocks and reduced incidents of household food insecurity by 59.6%; this is a phenomenal statistic.
All grants (child grants, old age grants, and COVID-19 grants) reduced the incidence of household food insecurity by 77.8% suggesting the need to expand the scope of existing social assistance mechanisms to reach those that are not benefitting, to ensure that there is food security and mitigate the effects of COVID-19.
[Other findings on slide 40]
The shock of the pandemic resulted in substantial welfare losses, particularly the risk of food insecurity.
The FFC recommends that The Department of Social Development should involve local governments and non-profit organisations to collect better information on those unmet needs and to better target groups requiring assistance during the pandemic; this comes from the fact that the grants mitigated and helped families to get through the shock.
The Department of Social Development should coordinate data on beneficiaries to create a database for the government for those who need social assistance.
The Department of Social Development should expand social assistance to increase the coverage of vulnerable groups.
National Treasury should consider incentives, such as lifting value-added tax (VAT) or duties on specific items to mitigate the effects of the pandemic against food insecurity.
Lastly, The Department of Agriculture, Forestry, and Fisheries should use food reserves optimally and target them appropriately to those in need during this time.
[Detail on slide 43]
Chapter Eight: Water and Sanitation Access, Distribution Efficiencies and Tariff Setting in South Africa
-During the pandemic, access to water decreased by two percent. This is huge considering that this occurred when water was needed the most.
-Almost 17% of households lack sanitation services.
-The FFC found that there were many inefficiencies across the system, such as water leakages. The findings also show that water service providers could maintain the same output with 49% fewer inputs. This means that they could provide more water with the inputs that they currently have. This indicates that there are many inefficiencies if providers can provide more water with their inputs. This inefficiency is driven by non-revenue water provision that accounts for 35% of the input volume water. The amount of water lost is a hindrance to the efficiency of the system.
-There is a need to be cautious in increasing tariffs during the pandemic; the poor could be most affected if tariffs are not considered properly. Water and sanitation are basic commodities.
-There is a need to involve the private sector in the provision of water. However, the FFC cautions that private sector water provision could lead to water being inaccessible for the poor. Municipalities could get the private sector to invest in infrastructure but should try to guard against making water inaccessible for many.
-Government does not have the funds to cover the gap in water provision infrastructure, especially in this fiscally constrained environment.
[Further detail on slide 46-48]
The FFC recommends that municipalities, advised by the South African Local Government Association (SALGA), should approach tariff adjustments cautiously taking account of poor people for the duration of the COVID-19 crisis.
The Minister of Finance should ensure that water and sanitation projects also form part of the stimulus package. The Minister of Finance and the Minister of Water and Sanitation, together with municipalities, should develop strategies that de-risk private sector water investments when bringing in private sector investors for infrastructure.
Chapter Nine: The Role of Intergovernmental Oversight and Support in Avoiding a Section 139 Intervention
Ms Sasha Peters, Programme Manager: National Budget Analysis Unit, FFC, said that when the FFC looked at the system of intergovernmental oversight and support that is provided by national and provincial governments to municipalities; it wanted to see the extent to which this system helps to avoid section 139 interventions.
The full pipeline of oversight comprises the regulations that municipalities need to comply with and the oversight that is conducted by the national and provincial government, to ensure compliance and pick up on challenges that can be mitigated. If challenges are found during oversight, there is capacity building whereby the national and provincial government can assist municipalities in addressing them.
If challenges are not addressed and there are breakdowns in service delivery, the final phase is intervention by the national and provincial government in the affairs of municipalities through section 139 of the Constitution.
The FFC’s concern is that the persistence of section 139 interventions raises questions of the effectiveness of oversight and support framework and whether it adds value in acting as an early warning system that identifies municipalities facing the potential threat of intervention.
-Intergovernmental oversight or supervision: the terms used are very important; supervision implies a more hierarchical relationship with the national and provincial spheres acting as a “big brother” for municipalities. The FFC prefers ‘oversight’, which embraces the autonomy of each sphere and requires all spheres to cooperate to solve any challenges
-Financial support: Support provided to municipalities can be financial and non-financial. The capacity building grants are a form of financial support to municipalities. The FFC looked at the financial management grant in more detail and found that, while the grant is critical for providing much needed funding to build financial management capacity, there is space for this conditional grant to be more tightly linked to the overall oversight and support system.
-Costs and benefits: It is accepted that new legislation and regulations have a cost attached to compliance. The FFC believes that the cost associated with monitoring compliance and support initiatives are not fully comprehended. For example, there are legislative monitoring requirements such as section 71 reports and ad hoc or non-legislative monitoring and regulations; municipalities spend time, effort, and money to comply with these but there is little to no concomitant benefit from the use of these resources. There must be a thorough interrogation of the costs and benefits when implementing new types of regulations.
-Differentiation: Local government must comply with a significant number of regulations. The FFC’s concern is that some of these regulations have a uniform approach whereby all municipalities must comply irrespective of their financial and human capital capacity to do so. This results in a situation where some municipalities who were simply unable to comply are continuously penalised because compliance becomes a measure of performance. The FFC believes that there must be some recognition of the varying capacity of municipalities.
-Legislative prescripts can promote duplication: Government departments operate according to legal mandates; some key legislation could be fuelling duplication for oversight and support. For example, the Municipal Finance Management Act, Municipal Systems Act, and various others all state how tariffs should be set, and there is a significant overlap. The FFC found that municipalities must also comply with requests on reporting by different sector departments and this creates an additional burden.
[Further detail on slide 52]
The FFC supports National Treasury’s review of capacity-building grants that National Treasury is undertaking but the FFC recommends that as part of this review. Consideration is given to directing that the two key financial management capacity building grants namely, the Finance Management Grant and the Municipal Systems Improvement Grant (MISA), be disproportionately directed at lesser-resourced, poorer, and more rural municipalities. These municipalities often struggle with finding resources to put solid financial management systems in place.
The Minister of Cooperative Governance and Traditional Affairs (COGTA) should implement mechanisms to ensure that there are evaluations of the impact of the entire oversight and support framework.
The FFC further recommends that emphasis is placed on cost-benefit analyses when new legislation, regulations, monitoring, and/or support initiatives are being introduced. With the cost-benefit analyses, the focus should not only be on the extent to which oversight and the support framework results in improved performance – such as an increase in the number of funded budgets - but to focus on the extent to which the oversight support framework is efficient and effective with the burden it places on municipalities.
Government should consider the uniform approach that is being used to implement the oversight and support framework and adopt a differentiating approach that recognises the varying capacities of municipalities when complying with regulatory and oversight or reporting requirements.
Finally, legislation that gives rise to duplication within the oversight and support framework should be reviewed.
Chapter 10: Leadership, Management, and Governance for Sustainable Public Service Delivery
Within the context of COVID-19, leadership is critical for the implementation of infrastructure projects. Effective leadership is indispensable in responding to the pandemic. These leadership requirements to respond to the pandemic are like those required to accelerate routine service delivery and the delivery of infrastructure.
To better understand how governance and accountability are hindered or enhanced by leadership, the FFC took a case study approach and looked at two housing catalytic projects namely, the Duncan Village in the Eastern Cape and Greater Cornubia in KZN. The FFC also looked at the Giyani Bulk Water Project. To hone in on accountability, the FFC used irregular expenditure as a yardstick; the Department of Human Settlements, over the period 2014/15-2019/20, was used for this.
Findings: Case studies
-While there are approved business plans for the catalytic housing projects, these plans are often not properly costed, which makes it difficult to get a true sense of the financing requirements.
-The FFC found a lack of intergovernmental coordination resulting from poor consultations amongst the various stakeholders involved in those infrastructure projects. There are numerous players in the implementation of catalytic housing projects; these include human settlements, roads and transport, and water and sanitation, to name a few. Often, these stakeholders have different priorities in terms of their infrastructure plans and sources of funding.
-The FFC saw that, in some instances, where municipalities lacked capacity, the HDA had then been tasked with the catalytic housing projects. This had then given rise to tensions between the municipality and the HDA; several municipalities that the FFC interacted with indicated that they were not properly consulted on key decisions that were taken.
-The political factions within political parties and direct political interference hampered or led to breaches in supply chain regulations and delays and cost escalations.
-The case study on Giyani showed similar challenges to those of the housing catalytic projects. Key among them was poor political leadership and interference, which had a knock-on effect for not following supply chain regulations, cost escalations, and delays in project completion.
Findings: AGSA – Irregular Expenditure
The graph on slide 58 shows the FFC’s findings after it assessed the Auditor-General’s audit outcomes for the Department of Human Settlements, over the period 2014/15 to 2018/19; the FFC focused on irregular expenditure. Irregular expenditure is the expenditure that was not incurred in the manner prescribed by legislation. It is an indicator of non-compliance that must be investigated by management to determine whether it was an unintended error, negligence or if it was done to work against the requirements of legislation.
The graph shows the significant acceleration of irregular expenditure from R88 million in 2014/15 to R3.1 billion in 2018/19; this exemplifies the disregard for the findings of the Auditor-General and reflects the severe lack of consequence management.
First, the FFC emphasises the need to enforce compliance with legislation and policy frameworks when undertaking infrastructure projects, and to ensure financial consequences for compliance failures.
Second, there must be an improvement in the intergovernmental coordination policy framework with large infrastructure projects, many stakeholders work together, and that framework should be tightened.
Lastly, consequence management must be incentivised.
Dr Mbava said that this was the end of the FFC’s presentation, and it was now for the Committee to deliberate and consider the recommendations.
The Chairperson thanked the FFC for their comprehensive report and briefing on the impact of COVID-19. He then allowed the Members to engage the presentation and recommendations presented.
Mr D Ryder (DA, Gauteng) said that he appreciated the presentation and input from the FFC. He congratulated Dr Mbava on her appointment as Chairperson; he looked forward to working with her and learning from her and her colleagues. He hoped that she would fill the shoes that were left and wished her luck. He wanted to confirm whether any other changes have been made to the FFC board.
He commented that the presentation included useful input, but it was not as critical as the ‘last lot we have had’. “There is a general acceptance that we found ourselves in a situation that we needed to work our way out of, and constructive inputs are therefore preferred”, he added.
His first question was on the equitable threat, specifically looking at local government. Municipalities have been struggling anyway, but there were the downgrades that have affected investments and metros. International investments have come up founder. Then there was COVID-19 and the insurrection in July, which has had a compounding effect on local government. Election rates have dropped lower and lower. Consumers are under tremendous pressure to pay their municipal accounts, not only their rates and taxes but also consumption accounts. This is because their income has dried up, they have reduced working hours, etc. This, in turn, is placing municipalities under extreme pressure. Certain municipalities, particularly in KZN, have been giving leeway to some businesses with their accounts based on the fallout from the rioting that has impacted their income streams as well. That again has a knock-on effect because factories that were closed due to the looting are not paying wages to their staff, and the staff cannot pay their rates and taxes. Is the FFC recommending an adjustment in equitable share to shore up local government finances against this?
His second question was on the term fiscal leakages. He recounted that this term was used in last year’s presentation too, and he asked a question about it then but did not receive an adequate response. He still felt that using the term ‘fiscal leakages’ is code for corruption. He had a look at King’s definition of leakages; it is defined as non-asset-oriented expenditure, etc. But what is the FFC getting at? The FFC used the broad term ‘fiscal leakages’; he asked the delegate to decode this code and speak openly with the Committee.
His third question was on the issue of local economic development (LED). There was a strong focus in the presentation on the LED component of the local government expenditure, and so on. The fact is that the scariest words that an entrepreneur can hear are “Hello, I am from the government, and I am here to help”. The reality is that, historically and traditionally, government does not understand business. LED is all good and well, but it must be done in concert with a focus on providing service delivery – actually providing services and local government doing what it is supposed to be doing. Until that is done right, focusing on LED is not the greatest idea. He understood that it might be necessary to focus on the development of living and working areas but there should be a focus on getting water and electrical supply and roads in order, for its customers. How does the FFC see LED play out? Is it not a better idea to focus on committing to core constitutional obligations where LED will follow? How many examples are there on LED projects that have worked? Perhaps best practice should be investigated, and success stories should be shared.
Finally, on credible budgets, municipalities need to pass credible budgets. He was aware of only two municipalities in Gauteng that passed funded budgets recently; the rest were passing unfunded budgets. “Unfunded budgets are Hail Mary budgets’, where we hope and pray that there will be money incoming to do what needs to be done”, he added. He understood that it is an election year and people are trying to ensure service delivery, but this is historically repeated. How does the FFC see DORA being used to incentivise good spending, good governance, good budgeting, and good procurement processes? The situation now is that performance and how money is spent do not matter, money is guaranteed to be incoming next year; there are no consequences. Consequence management is always discussed; does the FFC see any room to slightly amend DORA to include either an incentive or disincentive for good behaviour? He believed that positive reinforcement is better. Currently, there is no incentive other than a ‘noddy badge’ for people to implement good governance and good spending patterns.
Mr S Du Toit (FF+, North West) congratulated Dr Mbava on her appointment and thanked the FFC for their presentation.
It is staggering to see that the amount of people receiving government grants has grown in the past year. The tourism sector has a -70% growth. “We all knew it was bad; but did we realise the effect of that that was and is on the economy?”, he asked.
There has been an increase in debt service cost; it is costing the country more to get debt. The presentations from the Land Bank and the Development Bank of Southern Africa showed that investors are not as eager to invest in South Africa anymore. The unrest is costing the country a lot of money, with the impact estimated at costing the GDP R500 billion. There were also items not budgeted for such as the extension of the social relief grant, the deployment of the South African National Defence Force (SANDF), and the disaster relief provided to the companies that were affected by the looting. All of this is adding up, while there has been a shift of money between different departments – money that could have been spent more effectively on building the economy.
National Treasury has indicated that 44% of the unrest-affected businesses have closed between 09 and 19 July 2021; the Rand depreciated by 2.4% to the United States Dollar (USD), which had an impact on imports and exports and, in turn, the economy. The tax base is shrinking in the country.
The FFC’s presentation focused on inequality, which is a reality, but what should be considered is opening the economy for it to grow on its own. It is evident that legislative attempts have been unsuccessful and have worsened the economic position of millions of people in the country; further legislative measures will not turn the current situation around. “The social relief grant is assisting many people, but we cannot afford to move towards being a country that just hands out grants”, he added. As stated in the presentation, a huge number of people are dependent on the state, and government cannot afford to look after everyone through grants; people should not be kept dependent. His view is that the government is keeping citizens dependent to be voted in again. The FFC findings mentioned increased hunger, child hunger, and unemployment; he sees this as self-induced by the government because of the COVID-19 regulations imposed in the country.
When the pandemic reached the country, the initial lockdown was to give the health system and health sector ample time to prepare itself for the pandemic. The regulations after that were absurd and this put the country in a more dire state. Before COVID-19 the country was already in a dire state due to the looting of state coffers and state capture.
The support given to municipalities must be monitored. While he agreed that more money is needed for municipalities, there is currently no consequence management for the mismanagement of funds.
The FFC findings, on page 46, refer to water availability. It was mentioned that, during the pandemic COVID-19, the number of people with access to water decreased by two percent. How is this possible when the government spent millions on drilling boreholes, providing water to different settlements and areas, erecting water tanks at schools, etc.? How is it that the government spent millions for more people to have access to water and fewer people have access?
Mr M Moletsane (EFF, Free State) also congratulated Dr Mbava on her appointment.
Due to COVID-19, most municipalities are failing to keep up with paying their creditors; can the FFC advise local government on how to improve and collect their revenue? What steps should municipalities take to improve and collect their revenue?
Mr Y Carrim (ANC, KZN) congratulated Dr Mbava and wished her well.
A lot of what the FFC said has been said by others, such as independent institutions, non-governmental organisations (NGOs), other civil society structures, government, or various public entities themselves. The FFC can do what is set out in the Constitution, but the rest depends on Parliament, the executive, and other relevant institutions. It is not only the elected government that is responsible for any failures of the state. Parliament and civil society are responsible.
The LED has been unsuccessful; it is more than an ordinary failure. With due respect to the FFC, the prospects for the LED are even slimmer now. The FFC’s report was completed before the unrest. He was stunned to learn the consequences of the unrest: at least 14 500 jobs were lost, 89% of small businesses destroyed, 44% of which are closed. This situation is dire. The FFC did not have time to address the unrest comprehensively in its presentation, but the current situation is not just because of COVID-19; it is the social unrest too. There was approximately R50 billion lost in GDP.
For municipalities, because of the unrest and the property burnt down, property rates would be less in this financial year than what would have been anticipated when municipalities prepared their budget. Municipalities have also exempted affected businesses from paying property rates, and this has a severe impact on local government revenue. Municipalities cannot be responsible for the crisis that broke out. Has the FFC begun to look at this issue?
On the issue of the fundamental premise being wrong: saying that municipalities would raise 95% of their revenue might have worked in the old system but not in the new system that has expanded powers. As Mr Ryder pointed out, municipalities have been passing unfunded budgets. How would municipalities be able to function effectively and fulfil their constitutional mandate if it presupposed, wrongly, that they would secure 95% of their revenue? “This does not mean that we can excuse municipalities from their failures to manage their funds properly”, he added.
He thought that the Giyani project is a shame and huge strain on the state; it is a disaster. He did not know the latest on it and did not get that from the FFC, and things might have moved on. He heard ‘mutterings’ in the media that things could be turning around, but he does not know enough. The Giyani project has placed a severe strain on the state, and it has been in the public domain for a while.
Everyone is entitled to their view, and his view was different from the view that the state deliberately keeps people on social grants to win votes; he felt that this is an absurd claim. The government offers more social grants now than before, and there is a bigger drain on the fiscus. No one in the state has said that we should remain a ‘nanny state’ and have people on welfare. Various options were considered. It is agreed that grants are unsustainable and that we want economic growth and job-creating economic growth but, because of the gross inequalities, not providing grants would be inhumane and almost savage. There is a paucity of access to jobs and other resources; there are grotesque inequalities; 64.4% of young people between the ages of 15-25 are unemployed; the country has the worst job difficulties. “With 44% unemployed, what are we going to get if not more social unrest?”, he asked. Those issues must be addressed, and the FFC might want to be activistic in this regard. The government must do something or what happened in July would be only a flicker of what could happen a year from now or later.
The NCOP is concerned with equitable share, and the formula has never been resolved; what is the latest progress on that, and who will take the social unrest in July into account?
Mr V Lwana (ANC, Eastern Cape Provincial Legislature) said that there is a slide in Chapter 10 of the FFC’s presentation, which considers leadership and management of governments. His view is that the issues emanating from that hinge upon the effectiveness of intergovernmental relations, and this is proven true with the case studies that were presented, namely the Duncan Village and the national housing programme of the HAD; they show these tensions of intergovernmental relations. Not much effort is put into the collaboration of all spheres of government, especially local government, where development should take place. Issues on resources and equity come into play as well and these are things that also have a bearing on effective management and leadership for delivering programmes.
On gender-responsive budgeting: looking at the ideal and current situation, some of this is driven by values. One being a premise that talks to broader equity matters and a point of view of our country being a society fraught with inequalities, including gender disparities. There should be a programme that seeks to attract civil service that is aware or is made aware of those issues.
Has the FFC not looked at social grants, vis-à-vis sustainable programmes? He agreed that social grants are unsustainable but said that, if the aim to build a country independent of social grants, it must be driven at a social level with sustainable programmes that take people away from the dependency caused by the realities of society.
The Chairperson commended the great engagement by Members, and asked the FFC to respond.
Dr Mbava thanked the Committee for their extensive feedback.
Mr Fowler said that, on the local government equitable share, the real challenge is not the formula between provinces and municipalities but the vertical distribution. Local government only receives nine percent of the total amount of funds that are distributed by the government, while there are 278 municipalities. Municipalities are indeed unable to raise most of their funds. This is an issue that the Committee could take to National Treasury to consider improving the amount of funds that local government receives.
On local economic development, he responded that the core business of a municipality is to provide services. Most services that municipalities provide relate to infrastructure. So, if municipalities are addressing their infrastructure, the infrastructure will result in economic development. Two things need to happen. One is to provide basic infrastructure and infrastructure that is required for economic development that relates to access, roads, etc. This must be directed in concert with where investment is expected to happen. Unfortunately, for most municipalities and some metros, where economic development and infrastructure go is driven by development, and that does not necessarily happen equitably. This needs to be addressed by municipalities.
On municipalities improving their collections, he responded that the key challenge for municipalities is the reduction that has extended beyond the period of the first restrictions. This has resulted in municipalities having to make difficult decisions between the kind of services they can provide at the level that they used to and what services are crucial to provide a better life for human existence, and how municipalities address this to ensure that economic development takes place. The biggest challenge for municipalities is finding that balance and this is something that will occur differently for each municipality, depending on their circumstances.
On the social grant, he clarified that the current grant of R350 is not just a giveaway, it is vital for the continued survival of those families in need and for food security, etc; that is the basis of the grant. He does not want the FFC to venture into whether the grant should be sustained beyond COVID-19, as it has not carefully considered it and made recommendations.
Mr Tseng said, on the equitable share, that the former Chairperson said that the equitable share formula discussion is the wrong discussion. This is because there must be a distinction between the horizontal division, which is between local municipalities, or between provinces for the provincial equitable share. Before that, the vertical division is critical. After that 9%, as Mr Fowler said, it is up to the formula to decide. “The FFC, through research evidence, saw that no matter how heated the debate is in the horizontal division, we will still not get away with the 9% vertical division of revenue”, he added. That is what makes it the wrong discussion to have. There is a need for an adjustment, but to effect that adjustment properly and effectively, there needs to be differentiation between these two types of divisions, to direct the debate in the right direction. This also relates to Mr Carrim’s comment on municipalities' 95% own revenue assumption that is old, out of date, and the wrong assumption. There are 257 local municipalities, and some municipalities have more cattle than human beings or ratepayers. That, in essence, speaks to the error of one size fits all.
On fiscal leakages, he agreed with Mr Ryder. He thought that there was a need to expand the definition of ‘fiscal leakage’. Around two years ago, a former minister, in a speech, mentioned fiscal leakages in the sense of it being corruption. The definition of fiscal leakage in literature, which he would like to adopt, is the redundancy in liquidity, where money is flowing out without giving value. Cash and money are just a medium of exchange; if it does not generate value, that amounts to being wasteful or leakage. From an accountant or Auditor-General's perspective, it is more about wasteful expenditure rather than irregularity. With this expanded definition, things such as the cost of borrowing are a form of leakage. In essence, it is things we pay for, for the sake of liquidity and not creating value such as costs to investigate corruption. Considering some of the investigations and current commissions looking into procurement irregularities and so forth, they are all getting caught up years later finding out what happened and how much money could be returned; that amount will never be equal to the money wasted. The technical indicator to look at is to follow the money – where the money that was supposed to be used or allocated for a particular purpose sit; the money that is not providing a real impact or real returns on the cash purpose it was meant for.
On local economic development, he said that there is a need to shift the focus from local economic development back to the constitutional mandate and providing basic services. Without things like water, sanitation, refuge, etc., economic development is not possible at the local or national level. In essence, through research and many years of looking at how to bring about local economic development, the FFC thinks that it is impossible without those basic services and infrastructure in place.
On Mr Moletsane’s question on how best to get local government to collect revenue, he responded that local government cannot collect revenue if services are not provided. This is a major challenge for municipalities. No one would want to pay for a service that does not exist or was not provided in the first place.
On the cost of debt, he thought that it was important to state an international fact. South Africa’s debt-to-GDP ratio is at about 80%, with its cost of financing, as a percentage of GDP, being at four percent. In comparison, the United Kingdom has over 100% debt-to-GDP but one-percent cost of financing. The difference is the risk premium. Investors deem South Africa as riskier to invest in, and they are not willing to invest unless they are incentivised by South Africa paying more for borrowing money. This shows the weakening position of South Africa’s fiscal framework and fiscal standing. Looking ahead, South Africa’s debt redemption is at 20% for the next budget; this means that, before the next budget comes in, 20% of that money must go towards paying off costs before money goes towards services that are needed.
The term ‘consequence management’ has been thrown around many times. The FFC’s powers are dependent on Parliament’s power and resolve to bring the executive to account. Parliament, advised by the FFC, is deepening that need and the notion of consequence management. Those that are to be brought to account have been shifting that responsibility down. This has already started to happen in the procurement sector, where all the blame and consequence management are shifting downward into the organisation or department. The problem with this is that the impact of consequence management did not start at the top as it should, which is diluting the responsibility.
On social grants: the issue is not so much the sustainability of the grant but rather it is more about the incentive effect of the grant. Over decades and in historical facts, it is believed that jobs could be more incentivising than these grants of little amounts like R350 or other amounts. He thought that, at the end of the day, it is about what economic trajectory South Africa is looking at to solve the current issue or, looking more long term in incentivising the economic growth path of job creation and growth. A job is more retainable in the sense that, if a person loses that job, he or she can move on with those skills they have obtained as an individual, to create more job opportunities or work more and generate income.
Mr Aubrey Mokadi, Commissioner, FFC, said that he wanted to address Mr Moletsane’s question. He said that Mr Tseng rightly said that municipalities must provide services for revenue. The FFC has gone further. In Chapter four of the presentation, several steps that municipalities can take to attract revenue are provided; this includes diversification in the approach of revenue enhancement, streamlining to avoiding red tape, and improving the turnaround time to obtain licenses and permits and e-government. Considering the pandemic, the FFC has realised that one way of improving communications between municipalities and residents is through digitalisation and e-platforms. Therefore, if these could be utilised by municipalities, that could facilitate the processes and means for municipality revenue collection.
Linked to this is the issue of leadership that the FFC addressed in chapter 10. This is where the oversight Committee, such as that of the NCOP, could assist with addressing political interference and where it occurs. The FFC had provided two examples where there were weaknesses caused by political interference or the lack of proper leadership. It is necessary to enhance, enforce and provide support at the municipal level so that infrastructural projects that are needed to assist municipalities for their provision of services and revenue are not hampered by that lack of leadership.
Mr Jonas, on the question about the two-percent decrease in water access, responded that the FFC, in trying to understand water access, used information from the National Income Dynamic Study and the Coronavirus Rapid Mobile Survey, which collected data at different points during the nationwide lockdown. That data showed that the main reason for the decrease was the change in employment status that affected household income and thus affordability.
The Chairperson asked whether there was further input from the Committee.
Mr Carrim said that, a few years ago, the FFC communicated to Parliament that, although its role stems from the Constitution and it is an independent institution that should be taken seriously by National Treasury and other state structures, it was not being taken seriously. Of course, National Treasury is not obliged by what the FFC says, but it should at least give the FFC attention. Have things changed in the last few years? Has the FFC been receiving a better response to the submissions it makes?
Mr Fowler replied that in the FFC’s last few meetings, it has been addressing the issue of how it should adjust its recommendations so that more of them could be considered by National Treasury. The FFC is trying to ensure that their recommendations can be considered. However, the FFC does report directly to Parliament. A key consideration is that it is not an FFC role entirely; it is a role that must be jointly executed.
The Chairperson asked if there was further input from the Committee or the FFC.
There was no further input.
The Chairperson thanked the FFC, the Committee, and Members from the provincial legislatures for their attendance.
The meeting was adjourned.
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