Workshop on Local Government & Provincial Equitable Share formulas

NCOP Appropriations

01 September 2021
Chairperson: Ms D Mahlangu (ANC, Mpumalanga)
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Meeting Summary


The Committee convened a virtual meeting to which it invited representatives from Statistics South Africa, National Treasury, the Financial and Fiscal Commission, the South African Local Government Association, the Parliamentary Budget Office, the Department of Education and other stakeholders, to participate in a workshop to discuss the equitable share formulas for provincial and local governments.

The Committee is responsible for processing the Division of Revenue Bill and other matters, including the monitoring of conditional grants' expenditure at the local level. The invited teams were therefore asked to provide details of their roles in the equitable share formula process, in order to provide the Members with greater insight into what was involved. Following the presentations, Members suggested that these meetings needed to be joint sessions involving the provincial treasuries and legislatures.

The discussions at the workshop gave rise to a lengthy debate surrounding the reallocation of funds. The Financial and Fiscal Commission pointed out that when departments were discussing the reallocation of funds, the unfunded mandates were never taken into consideration. Reallocation of funds from the provincial to the local level inevitably resulted in having to cut the funding for health care or education, which nobody was willing to negotiate, because of their importance. Municipalities had to deal with challenges in raising their own revenue to provide services to their communities, and the impact of Covid-19 was not being considered. Local government services -- water, electricity, sanitation and refuse removal -- were essential to meet households' basic needs.

Meeting report

The Chairperson said the Committee had continuously received submissions from the South African Local Government Association (SALGA) about their concerns regarding the distribution of revenue amongst the three spheres of government. This matter was normally raised when the Committee consulted SALGA in compliance with Section 214 (2) of the Constitution on the Division of Revenue Bill. In the Committee's last Division of Revenue Bill consultation on 12 May, the matter had been raised again. It was suggested that the Committee organise a workshop on this matter to describe how the equitable shares and allocations of the revenue were arrived at when the Committee processes the Division of Revenue Bill and other matters, including the monitoring of conditional grant expenditures. The invited teams had consulted amongst themselves and resolved to capacitate the Committee. The approach that the Committee was going to follow was simple, focusing on the Provincial Equitable Share (PES) formula and then the Local Government Equitable (LGE) share formula

Statistics South Africa: Data for equitable share formulas

Statistical Production System

Ms Nozipho Shabalala, Chief Director: Poverty and Inequality Statistics, Statistics South Africa (Stats SA) said the organisation was responsible for outcome indicators, and sometimes produces output indicators. Impact indicators were outside the scope of Stats SA work, and become the work of policy analysts and researchers who do further research on Stats SA data and then talk about policy matters and policy recommendations, which was beyond its mandate. It reports on the indicators and uses information that is collected through surveys and census. The surveys were household and business based and registers and administrative records were used. Stats SA did not decide on the formulas for computing the equitable shares, nor the components that were the building blocks of the formulas. It did not decide on how the budgets were supposed to be shared or distributed -- it provides the data that serves as input data in the computation process. The role they played in this process was to provide data as requested by Treasury, and they tell Stats SA what data they want, and it is prepared as per their request.

Stats SA covers a wide range of indictors. 300 publications are released annually, and these publications provide insight on the population of South Africa. They describe living conditions, as well as provide insights on the economy of the country and the national environment. Stats SA had focused only on the data items that were related to the components of the equitable shares' formula for the presentation.

Data for equitable share formula

The formula components include education, health, the basic component that talks to national population, the institutional component, poverty and economic activity. This data was shared with the Committee.

According to the media population estimates, the South African population in 2021 is 60.1 million. Stats SA did not conduct a census in 2021, but an estimate was based on indicators of demographic change, like fertility, mortality and migration.

In estimating the population, the cohort component method is used, which is a technique that uses the components of demographic change to project population growth, using information collected from census and administrative records. This technique projects the population by age and sex, and the cohort component method takes each age group and ages it over time using survival rates. This was used to estimate the population. At lower levels of geography, it estimates the population in provinces, districts and local municipalities.

The Northern Cape is the smallest province in South Africa in terms of the population size, accounting for only 2.2% of the total. Gauteng accounts for more than a quarter of the total population. More than half of the population in South Africa lives in three provinces -- Gauteng, KwaZulu-Natal and the Western Cape. These three provinces account for 57.22% of the total population.

Ms Shabalala showed how the population shares by province had varied between 2002 and 2021. Gauteng had increased its share of the total population by 5.4 % points, while the Eastern Cape saw the largest drop -- from 14% in 2002 to 11% in 2021. KwaZulu-Natal showed a slight drop, from 20.8% to 19.1%. The increase in Gauteng and the decrease in the Eastern Cape may be explained by internal migration -- people moving in search of opportunities. Stats SA also provides population estimates and household estimates at the local municipality level.

The South African economy contracted by 6.4% in 2020. In 2019, the biggest contributor to the national economy was Gauteng (34%), followed by KwaZulu-Natal (16%) and Western Cape (14%).

Health was one of the components of the equitable share formula. 72.5% of the population reported that they normally consult in a public hospital when they are ill, while 26.2% reported that they consult in private hospitals. Only 0.3 % indicated that they consulted traditional healers. About one percent indicated they used other facilities. Only 17.2% were covered by medical aid, which explains the large proportion of the population consulting in public facilities.

Education was another indicator in the equitable share formula. There was a noticeable representation of learners who were older than the ideal graduation age in primary and secondary schools. In primary schools there were pupils who were aged between 17 and 20. In secondary schools, it went up to 24. The

General Household Survey (GHS) also provides figures for attendance at educational institutions, and this information was used in the computation of all the components of the equitable shares.

Ms Shabalala said the poverty component in the formula for the equitable share was a complex phenomenon. Stats SA measures poverty using many metrics - lack of income, level of expenditure, self-perceived poverty, lack of basic services and education, and indicators of inequality such as the Gini coefficient, living conditions and income.

Stats SA had not been able to conduct a poverty survey after the 2014/2015 survey because of a lack of funding, so it measures different poverty lines. There was an upper bound poverty line, a lower bound poverty line, and a food poverty line. The National Development Plan (NDP) tracks poverty levels using the lower bound poverty line. Looking at the overarching goal of the NDP, it codes the numbers as produced when using the lower bound poverty line. In 2015, the proportion of the population in South Africa that was living below the lower bound poverty line was at 40%, and a quarter of the population was living below a food poverty line. The poorest three provinces in the country have consistently been Limpopo, Eastern Cape & KwaZulu-Natal. Gauteng and the Western Cape remain the provinces with the lowest levels of poverty.

In 2015, the average household income was at R138 168, and median income was at about R54 349. Limpopo and the North West province indicate the lowest average household incomes. The average household consumption expenditure was about R103 293. The median expenditure was about R42 522.

The highest proportion of households benefiting from social grants were in the Eastern Cape, Northern Cape, Mpumalanga and KwaZulu-Natal. 45.5% of households throughout South Africa benefit from social grants.

(See attached presentation document for details)

National Treasury and Financial and Fiscal Commission: Equitable Share formulas

The presentation by National Treasury (NT) and the Financial and Fiscal Commission (FFC) was led by Ms Wendy Fanoe , Chief Director: Intergovernmental Policy and Planning, NT, and Ms Olorato Tlhoaele, Senior Economist: Intergovernmental Policy and Planning, NT.

Ms Fanoe said all departments and stakeholders had provided inputs, and those inputs had been consolidated. The Department of Basic Education (DBE) would be making a short presentation on the reforms that were being introduced in terms of scholar data, and how it was used in the equitable share formula. The reason why the Department wanted to split the PES format and the local government equitable share was because in formal discussions, the issues become intertwined and interlinked. This created confusion, because sometimes it involved two completely different formulas.

Ms Fanoe said the budget process was important in the annual division of revenue, and described the involvement of all three spheres of government in the process. The requirement for provinces and local government to provide basic services needed to be considered, as well as the ability for local government to raise their own revenues to provide those services. The local government equitable share would then cater for the poor, and not for all the services that municipalities must provide. It also looks at provincial and local government obligations in terms of national legislation, and at the predictability and stability of allocations. If one looks at the way that the PES and LGES were allocated, there were formulas or phasing provisions to specifically ensure that allocations did not grow or drop too quickly, so that municipalities and provinces could adapt to the new allocations. This was explained every year in the explanatory memorandum.

Ms Fanoe said the local, provincial and national spheres of government were responsible for providing different services to the people. Local government was the only sphere that provides water, electricity and sanitation to households. Provinces provide services such as clinics or hospitals, while national government provide services such as police stations and higher education. Municipalities play a key role in service provision and if they fail, it could have ripple effects on other spheres of government as well. If households do not get adequate clean water and sanitation, it means that provinces' health care services would be affected, so it was critically important that all three these spheres of government provide these services appropriately.

National government collects most of the taxes that are distributed between provinces and municipalities. The concern raised by municipalities is that they get the smallest share, but if one consider their ability to raise their own revenues, that share becomes much larger. Provinces have almost no ability to raise their own revenues, so these are important considerations when the division of revenue is determined. That is called the vertical division. What is important after the vertical division has been made is that the funds be equitably and fairly distributed amongst the spheres.

Before the budget is published, a wide range of consultation processes are conducted. These involve the national sector departments, where conditional grants for local and provincial governments are discussed; parliamentary and FFC recommendations that relate to the division of revenue are considered; the Budget Council meets for the Department of Finance to discuss provincial matters; there is a budget meeting that brings the Budget Council together with SALGA and the Minister of Cooperative Governance and Traditional Affairs (COGTA).

(See attached document for details)

Provincial fiscal framework

The structure of the provincial fiscal framework was made up mainly of transfers from National Government, as well as revenue that provinces raise through the functions that they were performing. Legislatively, provinces were also allowed to apply for new tax powers, but these would have to be approved by the Minister of Finance. Their own revenue was not substantial, particularly because the functions that provinces perform do not lend themselves to revenue raising powers. The main functions that provinces perform were education and health, which were provided to members of the population.

The equitable share was determined through a formula, and the funds were allocated in an objective manner so that NT could provide services by all the provinces. The provincial executive, through their own budget processes, determine how they allocate resources to the services that they provide. Conditional grants fund several functions, but these were mainly administered by the National department, which would be responsible for monitoring their performance through the division of revenue.

The two largest components of the PES formula were education and health, because they form the biggest functions that provinces provide. The distribution of the population was accounted for in each province. Members of the population would have to use specific provincial facilities to receive some services, so there was a redistributive element through the poverty component. Consideration was also given to ensure there was a basic administration that the provinces need to provide these services. The right environment needed to be provided for economic activity.

The data part of the formula was critical, mainly because it would inform how accurately the Department captures the level of demand and what each province faces when it comes to delivering the services. There was administrative data from the Departments of Health and Education that inform specific components that would relate to the utilisation of services within each province. The data was updated on an annual basis. When the funds are allocated through the formula, the process of consultation includes the provinces through the Technical Committee of Finance and the Budget Council. Once the allocations have been determined, there is a principle that phases them in over a three-year period. This was mainly linked to the need to create stability with regard to the transfers the provinces would receive through the equitable share.

The largest component of the PES was the educational component. The Department uses data from Stats SA, as well as data from the Department of Basic Education. The Stats SA data would account for every child in each province who was at an age where they should be going to school. Department of Education data is also obtained from the Learner Unit Record Information and Tracking System -- a system that allows the Department itself to verify the progress of learners throughout their schooling career.

Another main PES component was health care, where 75% of the formula is determined through a risk adjusted sub-component. The component provides an estimation of each province's risk profile by applying an index to the population, and considers the population characteristics within the province and what would be needed for health care to be provided. The Department was in process of reviewing this component with the focus on this index, particularly in respect of the population without medical insurance. Information is obtained from the Department of Health from their district Health Information Services, and they provide this data on an annual basis.

Each province would render services outside of health and education to members of the general population. Each province's component was based on the proportion of each province’s population, and this was updated on an annual basis.

There was a poverty component that takes into consideration that the formula has a redistributive element. This component accounts for people who would fall into the poorest 40% of households in each of the provinces. The data comes from an income and expenditure survey, and basically each province's proportion in relation to the survey is multiplied by the number of people in each of the provinces.

In the economic component, the formula recognises that the functions that the provinces perform to create an environment that allows for economic activity were relatively small, but aside from the social services that they do provide, they must also provide functions that would ensure that there was economic activity that continues within the province. The regional gross domestic product (GDP) data was used to account for the proportion that each province should receive from this specific component.

Once all six components were taken into consideration and once the data for each of the components have been calculated, the Department calls a weighted share for each of the provinces, and takes into consideration that a significant proportion of the formula is based on demographic changes within the provinces, and there should be stability in the allocations that each of the provinces receive. The components were not indicative budgets or guidelines as to how provinces should spend their allocations. Provinces were also still responsible through their processes to allocate the transfers that they would receive in relation to the functions that they provide.

The PES formula was currently being reviewed. In the 2018/19 financial year, the Department had made quite substantial changes to the education component, and they were currently in the process of reviewing the health component with the focus on the risk adjusted Index. The Department had extensive discussions with regards what had been brought across in terms of taking into consideration the rural nature of some provinces.

Education Management Information Systems: joint presentation with NT

Mr Bheki Mpanza, Chief Director: Information and Management Systems, Department of Basic Education (DBE), led the presentation on Education Management Information Systems (EMIS).

He said school administration was a system of government that was offered to all public schools, even independent schools, free of charge. It was maintained by the DBE and implemented by the provinces. At the school level, there was one system, where all data entry was available. The data was uploaded to a data warehouse at the provincial level. There was a dashboard that assisted district and circuit managers in understanding the data that was collected from schools so that they could intervene timeously. The school administration system, called SA SAMS, assisted schools with the administration, management and reporting needs of the schools in South Africa. If there was any change in policy, then those changes would be programmed into the system so that the sector knew that the policy was being implemented uniformly. The DBE standardises the implementation of the policies through the fiscal administration system. 98% of schools use the SA SAMS.

There were automated processes, and data was provided on the social development of children not receiving their social grants, so that learners' needs could be addressed. This was the benefit of having a government system that interacted with other government systems. Information was picked up through identity document ID) numbers reported by the principals. When an ID number was captured and it was fictitious, SA SAMS would kick it out of the system. The information was shared with Home Affairs to identify who learners were. The funding in the education sector was based on enrolment, so that was why it was very important for the DBE to put validation rules in place to ensure that the numbers reported were correct.. The Department was also able to pick up on duplicate learners, such as a learner appearing more than once in school, within the province, or appearing in more than one school across the provinces. The migration of learners resulted in the duplications. Provinces would allocate the learner to only one school, otherwise the DBE would be funding double the requirement. The validation of the system process identifies the failure to archive the records of learners who had changed schools. The Department had modernised the system by a piloting web-based system in the Free State and Northwest, and this would assist in dealing with current challenges regarding the duplication of learners.

Sharing the data with other government systems, like that in the Department of Social Development (DSD), helped to identify duplications and reduced the costs involved. The DBS identifies learners in areas where there are a high number of learners who are undocumented. The Department of Home Affairs (DHA) could send their mobile offices to target those areas and make sure the number of undocumented learners is reduced.

In 2012, 57% of retrieved IDs were correctly verified through the National Population Register (NPR) and this process continued until 2019, when the level was 93%. In 2019, there was a court case in the Eastern Cape where the Department was directed that should accept learners whether they had documentation or not. There had been a dip in 2020 to 89%, and it increased by one percent in 2021 to 90%. The Department continued to work with the DHA to assist learners who were undocumented so that it would not impact the quality of the Department's data. Data is shared between the DBE's Learner Unit Record Information and Tracking System (LURITS) and the NPR of the DHA. There was a clear trend that showed the impact of migration on the education system.


Mr D Ryder (DA, Gauteng) said he believed in the importance of local government. Stats SA had stated that every ten years they do a census, and every five years there was a household survey -- were these the only two big surveys that were used to update the numbers or were more regular updates given to the provinces? A census was supposed to be conducted this year, but had now moved to next year. The migration patterns following COVID would certainly be interesting, and might have changed a little bit from what they had seen in the past. The Eastern Cape had had a significant contraction in population, and the Education Department spoke about the migrations, but he would like to see all the provinces listed so that the Committee could get an idea of which provinces were growing rapidly. It would help the Committee to understand the movement of people and understand that those who were not migrating were generally the people who were mostly reliant on the government for funding and government services. The people that were migrating would be people that were looking for opportunities and improved circumstances. The Western Cape may be a big generator of economic value, but the influx of people was making it difficult to sustain service delivery at the provincial and local levels. Provincial treasuries play a big role in that process. Provincial finance committees tend to complain about National Treasury, as if the province had provided no inputs, when the provincial treasury had made inputs and needed to come and give account.

Mr M Moletsane (EFF, Free State) said that local government provides more services than the other two spheres, even though it was expected to raise its own revenue. The issue of Covid-19 had not been taken into consideration. This made it very difficult, and gave rise to challenges impacting on in local government's success in raising its own revenues. During this pandemic, local government had had a lot of matters to take care of.

Mr Y Carrim (ANC, KZN) agreed with Mr Ryder on bringing in the provinces. Provinces look at things from their provincial perspective when making their demands. The green and white paper process, the model being used, was the same with some modifications, which were nowhere near enough. Local government could deliver 95% of its own revenue, yet the government had a completely new system of much more wide-ranging powers and functions allocated at the Constitution level for what municipalities should do. It was a fallacy that local government could handle these expanded powers with the 95% of its own revenue. It was not convincing, and Treasury must look at this again. Progressive academics had said that the powers and functions must be shifted around. Provincial government needed to be less local, and local government needed to be strengthened, if need be, at the expense of provincial government. There was a shifting of powers and functions, and one of the problems was that local government was being held to task when it did not deliver on its Constitutional responsibilities. There were multiple ways of dealing with this issue, and altering the powers and functions would always be a suggestion. There needed to be more resources from the national fiscus into local government, and less to provincial government, which meant that departments would have to reconfigure their sources of revenue.

Given the effect of unrest in municipalities, where communities refuse to pay property rates, some fundamental changes need to be made instead of this constantly incremental review that did not go far enough. The question was, what should the Committee do? It should coordinate. A joint meeting was needed -- ideally this sort of meeting. Maybe the Committee needs to confer offline. Ultimately, it was the Committee that decides on the division of revenue. The Committee needed to develop a programme over three or four months in preparation, and then set the ball rolling as it goes into the next financial year. The Committee wants action.

The Chairperson thanked Members for their input and suggestions, saying they would help to improve the community and the country. The Committee would convene off-line to best discuss the ways in which outside committees could be included in the discussions and joint meetings.

Ms Maggie Govender, MEC: Finance, KZN, had asked about unfunded mandates and what was included. When the Committee meets with National Treasury, Provincial Treasury and the Finance Portfolio committee, nothing seems to emanate from the discussion. The declining student population was a concern, affecting the number of educators. This was a moving target, but she was not sure how it was factored in.

FFC input

Mr Michael Sachs, Deputy Chairperson, FFC, raised a couple of points which he thought were important in understanding why this debate was not being resolved. There were three dimensions of budgeting that could not be separated in any decision to reallocate resources. There was the division between the spheres of government, the choice of policy priority, and the choice of what inputs the government was buying. There was an inter-governmental dimension. There was a dimension of outputs. What were the outcomes being pushed and lastly, what were the inputs being bought? In referring to resource reallocation from the provincial sphere to the local sphere, as an example, the implication was that departments must spend less on either health care, basic education, or on the built environment functions that were allocated to provinces -- or less must reallocated from those functions to local government. The overwhelming bulk of provincial government budgets were for health, education and the built environment.

The Committee would agree that saying that funds must be reallocated was not always a good idea. One could not discuss reallocation without addressing the question of cutting down on provincial budgets to support local government. That was why the debate would go round in circles because clearly, departments do not want to reduce expenditure on health care or reduce expanding expenditure on basic education. But these were the fundamental things that provinces deliver, and the resources of the budget, through the provincial equitable share, were allocated exactly for those things.

The built environment was more interesting, because here it was not a question of the division of revenue. It was a question of a whole series of policy documents and agreements within government. Policy experts believe that certain functions in the built environment should indeed be reallocated to local government, and funds must flow following those functions. However, for some reason there was an unwillingness to implement this clear policy conclusion for housing. A share of the transport and roads budgets should probably be reallocated to local government, and the reason this policy decision could not be taken or not implemented had really nothing to do with the equitable share. If one understands budgeting, when one allocates funds from a province to a local government, one was simultaneously changing the composition of policy outputs that were being pursued, and with the link between those two things, one was liable to go around in circles.

The discussion departments should be having was not about the division of revenue. The discussion should be about the local fiscal framework. Where does local government raise its resources? How does it spend those resources? In that discussion, there was another fundamental impediment to coming to a conclusion, and that was the heterogeneity of local government. The Committee talks about local government as if it was one thing, but it was not. Cape Town, Johannesburg and Durban, as the presentation from Stats SA showed, was where the wealth of this country was concentrated. The metros were not the same in terms of their reliance on the national fiscus as others. The Committee did not want to acknowledge this heterogeneity. It ended up with national government being responsible for increasing taxes, because it was an unpopular thing to do, but metros like Johannesburg, Cape Town and Durban would sit on top of huge amounts of wealth. Their job was simply to spend, and they did not want to be involved in the tax raising debate.

There was a need to locate the discussion about the division of revenue in a policy framework. This was not simply a question of one sphere of government deserving more than another. The idea that local government was the only sphere that had an unfunded mandate was wrong. Every sphere of government had huge unfunded mandates. Departments were about to impose another very large unfunded mandate on national government called the Basic Income Grant. Committees would not want to reallocate funds. If Departments reallocated funds from national or provincial to local, they would be reallocating unfunded mandates. One would be shifting and it was unfair, as the funds would go from provincial to local, and the unfunded mandate would go from local to provincial. There was a need to take a more holistic view of these debates.

There was a need to recognise the heterogeneity in local government and accept that the problem in metros was not the same as in non-metro local governments. There were local governments that had a tax base and there were huge debates to be had about whether they were utilizing that tax base effectively before departments got to discussions of equitable share. However, by continuously posing the problem as simply one of inequitable shares, departments were essentially avoiding that debate. This was convenient for those metros, but was not the way one should approach it as a national policy.

Mr G van Staden, (ANC, Northern Cape Legislature) agreed that the discussion should be about the resource allocation within the country, and should be re-looked and reviewed. Minor adjustments should be made. It was not really assisting the devastating delivery challenges and deadlocks within our country which were manifesting themselves at the level of local government. Departments had unrealistic expectations, and these were projected on to local government. He echoed the sentiments of Mr Carrim. There needed to be more resources from the national fiscus into local government, and less to provincial government.

The Chairperson said that enough had been said about the equitable share and the spheres of government. He asked Stats SA how reliable their community survey was when compared to the normal census, which took place after every ten years. How did they think the country’s resources could best be allocated?

Stats SA's Response

Ms Shabalala responded on the frequency of the surveys. The census was conducted once every ten years, and a community survey was an intercensal survey, which means it was conducted in between the censuses. It was every five years between each census that was conducted. The census and the community survey provide the Department with estimates that could provide information. At a national, provincial, district and local municipal level, the community surveys even go further than that. These surveys provide information, which was their main feature. Their main trait is that they can provide information about lower levels of demography, and they are conducted on a more frequent basis. The labour force survey was conducted quarterly, and the general household survey was conducted on an annual basis. The surveys that were conducted on a more frequent basis allow Stats SA to report at a national, provincial and metro level because of the sample sizes, which was about 30 000 households.

Mr Ryder had requested that they unbundle the information about inter-provincial migration, and Stats SA would do that. A census would be conducted in 2022 which would also cover a wide range of questions on migration, and they would be able to update the information on the movement of people and migration patterns in the country. The data from the census was reliable. Stats SA conducts these surveys based on international best practices.

Ms Shabalala said Stats SA could not comment on the allocation of resources. It had a mandate that required it to collect information and indicate levels of poverty across geographic areas. Answering that question was outside the scope of its work.

Mr Diego Iturralde, Chief Director: Demography and Population Statistics, Stats SA, said that the estimates being used were the 2020 series of media estimates, and this series did not take Covid-19 into account because by June last year, its impact on the components of population change -- births, deaths and movements of people -- was very limited. The 2021 media estimates that were released at the end of July, however, make a statement on the impact of Covid-19.

With regard to the questions of population change at the provincial level, Stats SA could provide that. Population growth in provinces that had large urban centres would be far higher than the national average, and provinces like the Eastern Cape and Limpopo would probably have very little growth. The major population estimates in the report also produce a matrix of movement of people in a five-year cohort, so this would be from 2011 to 2016 and from 2016 to 2020. The reason for five-year cohorts was because migration is by and large a rare event. If one talks about international migration, one is looking at about six to seven percent of the country being foreign born. Internal migration is evidently a lot higher and probably has far more impact on the process that is being discussed today. Net migration numbers on internal migration, province to province, as well as net international migration, come out of the process of the media estimates, which involves using other sources of data in government to confirm the numbers that Stats SA produces. The administrative sources of data, mostly from Home Affairs, were extremely valuable, but they were currently in the process of drafting a memorandum of understanding with the DBE so that Stats SA could understand the data that Mr Mpanza had shared with the Committee today. The findings that he had made on migration were very encouraging, but of course Stats SA would like to have a closer look at that because migration, being a very complex event, was immersed in issues of definitions, and they would just need to make sure that departments were speaking about the same phenomenon.

Stats SA also makes use of external estimates. The United Nations Population Division does what they call migration stock estimates every two years, and Stats SA engages with them in that regard. The Organisation for Economic Cooperation and Development (OECD) collects information on the census of their member countries, and Stats SA can see how many South Africans reside in member states of the OECD and make use of these international databases.

Towards the end of July, a national migration and urbanisation conference took place, hosted by the Department of Social Development, during which Cabinet approved the establishment of a migration and urbanisation research and data forum, which it hoped would bring scholars, government, non-governmental organisations (NGOs) and even international organisations together, to discuss migration issues. Stats SA hopes that the outcomes of the research being shared there, and the data sources being concentrated at a forum like this, would lead to richer migration information in the years to come.

Treasury's response

Ms Fanoe said that three budget forums were held. The first budget focused on the financial status of municipalities, particularly given that a lot of municipalities, even before Covid-19, had been in a bad financial state. There was quite a bit of work being done there to see how Departments could fix municipalities. Several decisions were made on the fiscal framework as to how the Department could take the system forward, and recommendations had come out of that. It was collaborative work done jointly by National Treasury.

In the discussion on unfunded mandates, basic recommendations on the work being done had been shared with the Committee, and this was being tracked on a quarterly basis and was reported back to the Budget Forum on the progress being made. The issues raised during today's discussion were also part of those recommendations, and would be shared with the Committee again if necessary.

The third issue that was raised about the unfunded mandates involved the traditional leaders, and currently there was technical work being done between the Department of Traditional Affairs and National Treasury on that matter. That would be factored into the provincial fiscal framework as soon as the ideal way forward in that regard had been determined. Treasury was aware of the issue, and it was receiving attention, and if there was anything that was not dealt with properly, it would be captured under the local government equitable share discussion.

Ms Tlhoaele said that Mr Mpanza had raised an issue about the allocation criteria not taking into consideration the staffing levels at schools. It was important to keep in mind that the equitable share formula was not necessarily funding specifically for mandates. It was not necessarily funding the number of learners, but using the specific population to guide the Department in terms of the resources that should be allocated for provinces to provide services for those specific parents. It should be looked at in a holistic manner -- that the number of learners would be able to indicate the level of the burden a province would face in terms of the number of teachers they would need. It would also indicated the schooling facilities that would be required, and the administrative level that was needed for a digital education function to be provided, but it did not necessarily speak to the fact that the Department had excluded certain mandates or certain variables within the formula.

Mr Bongani Daka, Intergovernmental Policy and Planning Unit, NT, responded on the local government share that was being increased due to Covid-19, and the effect on the other two spheres of government. At the national level, the Department was responsible for providing the R350 that had also been allocated to people because of Covid-19 in the provincial spheres. Members should also be aware that when schools reopen, for example, sanitisation has to be provided. There must be extra cleaning at the schools. There were buses and taxis that needed to be sanitised and cleaned, and additional funding was required for the early childhood development centres to reopen. Covid-19 had affected not only local government, but all three spheres of government.

Local Government Fiscal Framework (LGFF)

Dr Plaatjie Mahlobogoane, Senior Manager: Equitable Share, COGTA, said the local domain fiscal framework referred to all the revenues available to municipalities, as well as all their expansion responsibilities. The main revenue source of a municipality was the municipal property rate service charges from trading services like electricity, water, sanitation and refuse removal. There was sharing of the general field levy and transfers from the equitable share, including the conditional grants. The main responsibilities of municipalities included administration, the provision of basic services like electricity, water, sanitation, roads, local development, community services like parks, sports and recreation, and the two needed to balance. The balance of expenditure was important.

The LGFF includes transfers and all revenues. The national transfers amounted to an average of 25%, while the local government's own revenues, which were mainly from trading services, were around 75%. Transfers were designed to fund services for poor households.

The structure of the LGFF was different in urban and rural areas. In cities with substantial economic growth, their reliance on national transfers was on average 20%, while municipalities with little economic activity rely more on the regional transfers at 80%, and resources at 20%. South Africa was increasing the differentiation in the funding system by recognising the different circumstances in urban and rural areas.

Municipal Revenue Categories

The audited figures from the 2018/19 financial year, and the revenue observation system was structured different accounts for 20% of total revenue, but a significant number of municipalities had limited electricity operations, and over 45 local municipalities did not have any electrical operations at all. There were no function transfers, which meant that they also did not receive transfers, and this accounted for 23% of revenue.

Local government was entitled to the equitable share of nationally raised revenue to enable the provision of basic services and all its allocated functions. This was an unconditional grant and they could provide funding from this budget to give out free basic services to poor households and subsidise the cost of administration and other processes for those municipalities with the least potential.

The formula used to allocate the LGES was reviewed during 2012 through a collaborative and consultative process that included the Department of Cooperative Governance (DCoG), Treasury, SALGA, the FFC and Statistics SA. The principles that were outlined were those which were consulted on during the review, and agreed to by the various stakeholders. The formula was objective, fair and dynamic, and it would respond to changes and recognise diversity amongst municipalities. It used only high quality, verifiable and credible data. It would be transparent and simple, and provide for predictability and stability.

The formula was permeable. The first part was the basic services component, which provides for the costs of free basic services to poor households. The second part enabled municipalities with limited resources to afford basic administrative and governance capacity and perform core municipal functions. The institutional component provides a subsidy for basic municipal administrative costs, and provides funds for other community services not included under basic services, like fire, municipal health, municipal roads, etc. The revenue adjustment factor ensures that funds from this part of the formula are provided only to municipalities with limited potential to raise their own revenue. The third part of the formula provides for predictability and stability through a correction and stabilisation factor, which ensures that all the formula's guarantees are met. The revenue adjustment factor ensures that more funds go to the poorer municipalities.

LEGS was allocated through a formula that had two objectives. One was to enable municipalities to provide a package of free basic services -- water, energy, sanitation and refuse removal. The formula was annually updated for household growth, and to account for bulk water and electricity costs, as well as for inflation-affected other costs. The formula provides for various sizes of its different components. The biggest share goes to the basic services component, which is at 79%. The default position was to fully fund the basic services component first, and then the balance was used for the institutional components.

(See attached document for details on LGFF)


The Chairperson said that most of the time, they would say that local government was closest of the three spheres of government to the public. The assumption was used to allocate the 9% for municipalities, but whether this assumption was still valid, especially given the conditions posed by Covid-19, made this questionable. Was it the right time to review that assumption? The Department had been asked whether local government should be funded in line with their constitutional functions so that committees and departments created an alignment between the functions and resources that were allocated. The majority of municipalities had shown some signals of not being able to raise their own revenue. Some small municipalities did not have revenue sources by virtue of their geographic location. He asked to what extent National Treasury and state stakeholders consider the unfunded mandates when reviewing the LGES.

Mr Nceba Mqoqi, Chief Financial Officer (CFO), SALGA, referred to the 9% equitable share allocation for municipalities, and commented that it was primarily only a horizontal allocation which needed refinement. The Department had addressed the matter emanating from the vertical allocation, and with the resolutions that had been taken, work was currently unfolding to deal with it.

Mr Ryder said there were three basic service components, one of which was electricity. For many of the affected municipalities, there was a one size fits all approach -- there was a consistent amount per service allocated. The electricity component was the interesting one, because in many municipalities electricity provision was done directly by Eskom, particularly in the more rural municipalities. Eskom supplies electricity directly and the municipality plays no role in that. Did those municipalities still receive the same formula, or was the electricity component taken away from the municipalities? Where did Eskom supply directly? That would favour the more rural municipalities, since they would be providing only three of the basket of four services, so they were being compensated a little bit more.

His next point was related to the cost of delivering services. The cost of delivering water to a household in Cape Town was substantially below the cost of delivering water to a house in the Northern Cape. The formula had been mentioned, but it did not indicate what it had been made up of. Was there any compensation for the cost of the actual service delivery? In the Northern Cape, there were much greater distances, and therefore if one wanted to supply piped water to a house, one needed to provide an average of two kilometres of pipe per house. Was that considered? Using the Department's formula, geographic size and population density was that the best way of deriving the cost of service delivery.

Mr Ryder also asked for guidance on how to read some of the slides outlining the allocations for administration and community services, as they did not seem to be in alignment with each other.

Mr Sachs said that he would like to take the debate forward, and the best way of doing so was by posing some questions because this presentation on the local fiscal framework had been excellent. It told them that municipalities were essentially funded from four sources. There was the local equitable share, the conditional grants, the user charges on services that local municipalities provide, and the "wealth taxes" because of property rates. He questioned the relationship of the LGES to those four sources of revenue. Did the allocation to metros through the fuel levy, somewhere between R15 and R20 billion each year, distort the equity? The Committee might think that this distorts the redistributive character of the conditional grants to local municipalities used to finance capital spending to a large extent. The question was whether metros were able to borrow more to finance their capital spending. If they were able to borrow more to finance their capital spending, could some of these conditional grants be reallocated to those municipalities that did not have this facility themselves? If more was borrowed, they would need to sustain that borrowing from their own rates. The wealth taxes are possible to impose in metros, but if one looked at national government, as everyone knew, it was in a fundamental position of debt unsustainability. On the other hand, metros do not really have much debt, so the question on the conditional grants would be whether metros could borrow more to finance that part of their commitments. Were municipalities in a position to politically impose that burden on their residents? The reason he was asking this question was that the primary purpose of the local equitable share was to offset the burden of user charges on the poor. Municipalities are unable to impose effective charges for the services they deliver, including on the non-poor components of their residents. They were generally unable to collect and impose that burden, which may be a political issue. It may be impossible to impose that burden because it would lead to political consequences for the municipality. There were also technical challenges that many of them had been having in collecting revenue effectively. This was a much better debate to have, rather than confining it to one element of that framework, which was the local equitable share.

Mr Ryder agreed with Mr Sachs.

Ms Fanoe said that the electricity component of the local government equitable share went to all municipalities that were authorised for that service. When the equitable share formula was calculated, it looked at the number of households in the municipality and it then applied it to the electricity cost. It did not matter whether Eskom provided this service or whether the municipality provided the service -- the municipality received the equitable share for their electricity allocation. There should be a funding agreement signed between the local municipalities with Eskom to provide a portion of the equitable share to Eskom to ensure that it was provided. Funding agreements were in place, and some of the money then gets transferred to Eskom.

Mr Letsepa Pakkies, Senior Economist, NT said the law did not allow for the equitable share to go directly to Eskom. In the Northern Cape the cost of delivering services there would be much higher. A review was done in the Western Cape in 2012, a costing had been done, and it was implemented. A study had been sanctioned which would then look at the most appropriate way in which to do this with regard to the equitable share. Treasury was trying to address the issue, and for now the Committee can rest assured that the formula really does try to take the differences into account, and these factors were applied in the revenue adjustment factor. Next year’s census would assist the Department to update its initiatives. It had considered the new reality that the municipalities have faced, because over the years some had really struggled with the collection. In additions, some residents in those municipalities had lost the ability to pay. This had created number of issues that had also been raised, including looking at the inadequacy of the 9%, as well and the budgets. Some issues were systematic, while others were related to how municipalities themselves could make better and more efficient use of resources that already were limited.

The issue of powers and functions had been left unattended for a while now, with municipalities continuing to take certain provincial functions without the necessary resources to do so. The budget office had been quite clear on that, and had pointed out that mandates were a huge financial burden for municipalities, as already indicated in this workshop. Without the funding, they were being left quite stressed financially. However, the regulations to revise the Municipal Structures Act had already been drafted. This matter really tries to address the issue of powers and functions, which was quite important because it addresses several issues that were related to how local government was being funded, bearing in mind that the formula could not really deal with that because of the implications for the formula.

Mr Ryder said he not understand how could a rural municipality could get a R47.1 million institutional component allocation, but the total allocation was only R19 million? Treasury should explain to the Committee exactly how municipalities' allocations were calculated through a practical example.

The Chairperson responded that Mr Pakkies had requested the specific name of the municipality, and had said that he would attend to that.

Mr Pakkies agreed, and said that he would do the calculations and send the information to the Committee.

Ms Fanoe said that the National Treasury's website had an Excel spreadsheet that explains exactly how the allocations for municipalities are put together. The Department could provide the sheet that contains the breakdown for each municipality, how much they get through the basic services component, and how much they get through the institutional component and revenue-raising. The Department would give schematic breakdown on how the allocation for each municipality was determined, because it was formula driven. It worked the same for all municipalities.

Mr Ryder asked Treasury to send a link to the information he wanted on their website, because their website was too busy.

Dr Dumisani Jantjies, Deputy Director: Parliamentary Budget Office (PBO), said that they would consider the discussions, and that the input was welcomed.

The meeting was adjourned.

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