In this virtual meeting, National Treasury briefed the Committee on the Division of Revenue Bill.
Members heard that the national share of revenue declined at an annual average rate of 1%. Transfers to provinces increased at an average annual rate of 1.4%, with conditional grants growing faster than the equitable share. Transfers to local government grew at an average annual rate of 7.9%, mainly as a result of the higher than inflation growth in the equitable share. The Division of Revenue was highly redistributive. Though the tax base is concentrated in urban areas, rural areas receive more per capita/per household through Division of revenue. Transfers per household to the most rural municipalities are more than twice as large as those to metropolitan municipalities. More rural provinces receive higher allocation per capita than urban provinces. Allocations to local government were growing at a higher rate than other spheres, receiving generous increases relative to national and provinces.
The Committee asked questions about the equitable share and the equitable share formula. It was asked if National Treasury believed that the provincial equitable share was adequate for the province. Was there a process in which National Treasury engaged with provinces to comb through the provincial equitable share and check whether it was adequate to sustain the provinces? The members raised concern with the use of census date in the making of calculations. This meant that the data was based on 12-year-old assumptions. Was National Treasury looking at any adjustments in how it calculated the equitable share for provinces based on changes in population and migration based on estimates that came from Stats SA? The Committed asked Treasury if provinces still picked up hospital fees? If they did, what was the percentage of this revenue to provinces? Members of the Committee raised the issue of the use of consultants. This matter had been lamented for quite some time in previous Committee meetings. The members also discussed the capabilities of municipalities and provinces to use conditional grants. When grants were allocated, what framework did Treasury use to determine whether a grant could be allocated to a particular institution?
The Chairperson welcomed everyone to the meeting. He also welcomed the delegation from National Treasury. The Minister of Finance, last week, tabled the Budget. Among the Bills tabled that day was the Division of Revenue Bill. That was the Bill which divided national raised revenue amongst the three spheres of Government: national, provincial, and local government. Today, National Treasury would brief the Committee so that the Committee would have an opportunity to interact with the Bill. Once the Bill was processed by the Committee it would go to the National Assembly where it would be debated and adopted. Then it went to the National Council of Provinces. The Select Committee on Appropriations would interact with the Bill and debate it. Once passed by that House, it went to the President to be signed as law. That was the process that the Committee was starting today with the Division of Revenue Bill. The Chairperson invited National Treasury to brief the Committee.
Briefing by National Treasury on Division of Revenue Bill [B6-2022]
Ms Malijeng Ngqaleni, Deputy Director General: Intergovernmental Relations, National Treasury, briefed the Committee on the Division of Revenue Bill. The presentation provided an overview of the 2022 Division of Revenue. It detailed the provincial government allocations and local government allocations. Finally, it stated the changes made to the Bill’s clauses and schedules. National share of revenue declined at an annual average rate of 1%. Transfers to provinces increased at an average annual rate of 1.4%, with conditional grants growing faster than the equitable share. Transfers to local government grow at an average annual rate of 7.9%, mainly as a result of the higher than inflation growth in the equitable share. The Division of Revenue was highly redistributive. Though the tax base is concentrated in urban areas, rural areas receive more per capita/ per household through Division of revenue. Transfers per household to the most rural municipalities are more than twice as large as those to metropolitan municipalities. More rural provinces receive higher allocation per capita than urban provinces.
Annual growth in allocations to spheres
• Allocations to local government have been growing at a higher rate than other spheres, receiving generous increases relative to national and provinces.
• For most part national government has been receiving the least increases with negative increases from 2021/22.
• The declines from 2019/20 can be attributed to the fiscal consolidation measures that were introduced in the 2019 MTEF.
Substantive changes to the Bill clauses
Most of the Bill clauses remain the same from one year to the next. Changes in the 2022 Bill
• Clarification of the funding source for additional allocations to provinces and municipalities.
• Expediting spending of transfers funded from the contingency reserve.
• Enforcement measures for transfers made to Eskom and water boards.
• Finalisation of allocations to municipalities, schools, hospitals, and entities from provincial budgets.
Ms D Peters (ANC) asked whether National Treasury believed that the provincial equitable share was adequate for the provinces? She provided an example of the Northern Cape where between 70% and 80% of the provincial equitable share was spent on salaries. Had it not been for the conditional grants, provinces were going to have serious challenges. She was not justifying it, but she understood at times why provinces and municipalities seemed to veer towards using the conditional grants to cover other costs as opposed to what the money was intended for. Was there a process in which National Treasury engaged with provinces to comb through the provincial equitable share and check whether it was adequate to sustain the provinces? She asked if provinces still picked up hospital fees? That could be a source of revenue that they collect. If they did, what was the percentage of this revenue to provinces? What was the view of National Treasury on the municipal debt that was owed by provinces to municipalities? The Committee sounded like a broken record. Since 2019, when the Committee started, it had been raising this issue. It had been raising the issue in the debates in Parliament and reports to Parliament. However, the situation did not seem to improve. What was National Treasury doing to make sure that it could raise the issue of how municipalities debts increased annually based on what provinces owed? She noted that the private sector and other role players, including National Departments, owed municipalities too.
Mr A Sarupen (DA) had a question around the equitable share and the division of revenue. His understanding was that all of these calculations were based predominantly on census data, from census 2011. South Africa urbanised at a massive rate. From all preliminary estimates, including community survey 2016, that over 66% of the South African population were living in about 12 urban centres. This meant rural areas were becoming increasingly sparsely populated. This meant when the Committee was presented with this data, the data was based on 12-year-old assumptions. Was National Treasury looking at any adjustments in how it calculated the equitable share for provinces based on changes in population and migration based on estimates that came from Stats SA? The reality was that Government delivered services to people and not to land. That needed to be kept in mind. He noted that none of the provinces were homogenous. When money was divided to municipalities, did National Treasury take into account the characteristics of the municipality and not just the province it was in? For example, Lesedi Local Municipality in Gauteng was very different to the Johannesburg Metro. Different municipalities in the same province had different profiles. How did National Treasury calculate that when coming to its assumptions?
Mr O Mathafa (ANC) discussed the use of consultants. This matter had been lamented for quite some time. The usage of consultants actually drew from the money that could be used for service delivery. When the accounting season started, the work was shoddy or there were still challenges that were supposed to be resolved by the particular consultants. What was the view of Treasury? What measures were in place to ensure that the practice of using consultants, even where municipalities and provinces had fully staffed departments, was eliminated? He discussed the capabilities of municipalities and provinces to use conditional grants. When their grants were allocated, what framework did Treasury use to determine whether a grant could be allocated to a particular institution? For prudency, the past performances needed to be tracked and what these institutions were capable of achieving needed to be considered before allocating money. If the institutions failed to use the money, then it should come back. If National Treasury did due diligence upfront, then it might be able to identify whether the funds would be fully utilised. He discussed infrastructure projects. In the previous presentation there were certain municipalities losing the qualification on the public transport network grant. When these particular municipalities were disqualified for failing to use this grant, what measures were in place to mitigate the unintended consequences of these unfinished projects? He provided an example of the Rustenburg Rapid Transport project that was not complete. For many years, there were half-built structures. Some of the roads were partially operational. For many years, this was an inconvenience for residents and motorists. What measures were there in place to ensure that when a particular programme was disqualified that the unfinished project was not an inconvenience?
Mr X Qayiso (ANC) asked how confident Treasury was that it would see the return on investment on public infrastructure investment? The previous day when the Committee received a presentation from the FFC, there was an indication that the state of SOCs was in a decline. SOCs were central to infrastructure development. How confident was Treasury that these SOCs would be able to deliver? It was important to understand that. He discussed the capabilities of municipalities. It was not an act of just pumping money. Was Treasury in a position to make an assessment about the capabilities of municipalities to implement these infrastructure programmes? It was very important to get that understanding. Otherwise, it would be a malicious act of pumping money without gaining insight into whether there was the capability or capacity for delivery. Had Treasury made any inroads in assisting provincial government to improve the organisational structure of municipalities? Was treasury able to intervene and assist? What had been the impact of the infrastructure fund on catalysing private investment in local municipalities? There was a serious problem of financial delivery in a number of municipalities. The Auditor-General’s report reflected that. How did Treasury intervene to assist in that particular space? With the rising debt service costs, how would the Government ensure that this did not have a crowding effect? The President had raised the matter of the crowding effect on social spending. How would Treasury deal with that?
Mr Z Mlenzana (ANC) said that from 2019 the trend of the presentation had been the same. It was just a question of minor changes in terms of the figures. At what stage was National Treasury going to do away with the baseline mentality? He noted performance per municipality, performance per province. A situation needed to be avoided where money was pumped in only to find that when the third quarter reports came around, that very little of that money had been correctly spent. Running into the last quarter there was often fiscal dumping. He supported the money allocated for assisting the independent power producer’s office. How was monitoring? Eskom had been a thorn right through and continued to be a thorn in the flesh of Government. How was monitoring of this particular allocation of assistance to the IPPs office? He discussed the monitoring of expenditure. How was National Treasury monitoring that the money that was appropriated was actually being spent for what it was intended for? He provided the example of money spent for litigation which was not supposed to have been spent. He noted that more money was going towards the wage bill instead of infrastructure-built programmes.
Mr E Marais (DA) said that he could not agree more with Ms Peters. What measures and penalties were in place for those municipalities that did not spend fund for the purpose it was granted for? There was the serious problem of grants being used to foot the bill of salaries at a municipal level. How would this problem be addressed in the future? Were there penalties and could Treasury advise the Committee on the ways it could handle this problem in the future? He touched on the point Mr Sarupen raised about Stats SA. There was a lot of migration since the last formal census, from one province to other provinces. Had Treasury made adjustments to give to those provinces that now had a much higher population than previously? Or was Treasury waiting for the new survey by Stats SA when it did the necessary allocation to provinces?
Mr Mlenzana discussed the capacity of leadership at municipality level, both the political and the administrative arms. Towards the end of last year, he was exposed to a session with the municipality labour unions, across political divides. They all said that there were capacity challenges, both politically and administratively. How was Treasury going to manage this, particularly now that there was political instability in municipalities where there was power sharing? That might lead to more money being wasted and unaccounted for.
The Chairperson asked the members if they had any more questions.
Mr Sarupen asked if National Treasury had noted the better audit outcomes from coalition governments as opposed to majority governments?
Mr Qayiso said that there was an allocation of R200 billion for small businesses to access. Had Treasury made any assessment to what extent this objective had been obtained? What would be done to correct this in the future?
Ms Peters asked for Treasury’s view on the use of consultants. For many years, there had been a decision that Government should reduce the overreliance on consultants. She noted that some of the grants were not spent. It was often because the service provider was not appointed. The service provider was a consultant. She highlighted the use of consultants compared to the wage bill and said it did not make sense.
The Chairperson asked National Treasury to differentiate between direct and indirect grants. What factors were considered when identifying a grant as direct or indirect? There was an argument which had been presented in previous meetings that conditional grants were National Departments’ budget and were not what Government claimed them to be. What was Treasury’s comment on that? There was an increase for basic services. The presentation noted that the sphere of Government it was sent to had failed to use that money. What was happening there? Was Treasury able to provide more information on that issue? There were also SOEs at provincial and local government. Did Treasury have sight of what was happening there and their state? Did the SOEs still have the ability to provide the services they were supposed to provide? These SOEs received allocations from the respective governments. Did Treasury have sight of what was happening there? If the answer was yes, then Treasury should share with the Committee what was happening.
Ms Ngqaleni said that there were a lot of questions around allocation and the allocation of the equitable share for both provinces and local government. There was also a question about whether the formula responded to population growth. She responded to the question on whether the equitable share was adequate or not. Treasury engaged with provinces. Treasury had engagements called ‘benchmark’ where it looked at how provinces were allocating their budgets and where the pressures were. Treasury looked at whether it was aligned with what it expected. Provinces received more than 96% from National Government. Provinces own revenue was between 3% and 4%. Most of the money they received was from National Government. The question of adequacy was a difficult question because money was not enough. If there was more money, then there would be more spend. Everyone would demand more money. Treasury believed that with what had been allocated it has taken into account and tried to restore some of the baseline erosion that encroached on having to reduce the number of people or having to cut down on goods and services. Treasury believed that the additions that had been made were responding to the pressure seen in the provincial budget. She noted the inefficiencies in provinces and how they managed their spending, and the ration between non-personnel and personnel spending. There were provinces where they were spending more on personnel and there were some inefficiencies in terms of how the personnel was being managed. That was part of what Treasury was assisting provinces to look at in terms of personnel management. It needed to be ensured that provinces were the right size and had the right people. There were some differences in terms of the ratios of how much was spent on personnel and non-personnel between the provinces. The allocations were meant to be equitable so that it enabled them to respond to the challenges. The management within them could be something that was a challenge.
She responded to the comments made about consultants. There were a lot of questions around the use of consultants and value for money. Treasury was not convinced that Government was getting value for money for infrastructure. The biggest problem relating to infrastructure was the capacity and capability to spend. There was often underspending on infrastructure. When Treasury did its checks it identified that Government was not receiving value for money. The projects would often cost much more than what they were actually tendered for. She highlighted that the quality and location of some of the infrastructure was a problem. These were the issues Treasury raised at a national level. There was a big effort through Infrastructure SA to improve the performance in infrastructure and accelerate delivery. There was a challenge of Sate capacity. Infrastructure SA was looking at how to enhance State capacity. That could entail using more of the private sector. How did Government ensure that the private sector actually delivered value? That depended on how the consultants were managed. The use of consultancy was not a problem if it was being used in a correct way and if they were managed. The State will never have all the skills to deliver infrastructure that was needed. That was where working with the private sector became quite important. The important thing was for Government to plan and define its needs. Government needed to manage them so that they did not cost the public sector more than when they delivered services in the private sector. It was not an issue in itself. It was about how Government managed its own personnel so that there was not a huge amount of people while also using the private sector to deliver some of these services. That balance was still a challenge, and it was something that Treasury often raised with the municipalities.
She responded to the question about whether Treasury took into account the capability to allocate resources. She also responded to the difference between direct and indirect grants and whether conditional grants were national functions. National conditional grants were part of the National Departments’ tools to influence performance within their sectors. Departments defined the policy that drove those conditional grants. Departments also defined the allocation criteria. The decision about whether the grant was direct or indirect also came from Departments. Treasury did not like indirect grants because they had implications in terms of a distortion on the powers and functions. The spheres would still have to own the infrastructure that was delivered by another sphere of government, in the case of an indirect grant. Treasury had allowed that because of the issues of capability. National Departments could identify when there were problems in certain municipalities due to lack of capabilities and people were not getting resources. If municipalities were not delivering services then Treasury took back the money. If municipalities were underspending, then the money had to be returned to the fiscus. The Department that was responsible for the function had to make sure that delivery took place. The Department then had to make a determination in terms of how it supported capacity. Treasury wanted Departments to look into how they supported municipalities to build their own capacity. She noted the Municipal Infrastructure Support Agent (MISA) which was meant to support and enable COGTA to support municipalities to deliver infrastructure. Treasury believed that Government was provided a huge amount of enablement. It all depended on the sectors themselves and how they were managing the conditional grants to ensure that there was value for money. She said that direct grants were the same. Direct grants get allocated to Departments which then allocated to municipalities or provinces. The grants were then appropriated in those municipalities and provinces. It had to be accounted for in their books. Municipalities and provinces had to report back to the Departments in terms of how much they were spending and how they were performing. Indirect grants were allocated and appropriated in the National Departments. The Departments were actually responsible for implementing that grant on behalf of the municipality. Treasury was concerned about the returns on investment. The problem was not more money. The problem was making sure that the delivery actually provided value for money.
She responded to the question about whether Treasury was supporting municipalities, provinces to improve organisational structures and the issues around capabilities of municipalities and assessment. These were institutional issues and arrangements regulated through the Municipal Structures Act. This was under the functions of COGTA. It needed to be ensured that these municipalities had structures that were fit for purpose. It was not the space Treasury was involved in.
She discussed the rising Government debt. Treasury was would be releasing the Section 71 report, six months into the year, of municipalities. What was seen there was that Government debt had grown to almost R20 billion. Surely that was not correct. Even businesses owed with regards to debt. People that should be paying municipalities were not paying. Treasury told municipalities that it could not be their debt collectors. It cannot work. Treasury could not be running around and telling people to pay. Municipalities needed to implement their credit control over those businesses that did not pay. Why were municipalities not dealing with the Departments that did not pay? If it was a hospital, why were they not going to the regional office to make sure that they paid? The problem is that there had been too much politicisation of the credit control policies. Municipalities remained helpless when they were not helpless.
She discussed Government borrowing. In 2008/2009 Government borrowed less than a trillion and now it was around R4.5 trillion. The more Government borrowed, the more it increased the cost of servicing. To consolidate, Government needed to reduce its deficit. Government needed to reduce the rate at which it was spending. There was no other way to control the debt service costs other than not borrowing more. Government was trying to not grow the debt at a rate in which it was actually impoverishing the poor even more. Government needed to contain debt. She noted that borrowing from the multilateral organisations was cheaper and it was part of Government trying to contain debt. Government needed to borrow less. Government needed to spend money more efficiently.
She discussed Eskom. The Department of Mineral Resources and Energy was responsible for integrated energy grant for municipalities. Eskom helped the Department deliver that grant. Some money was cut from the IPP office to strengthen the whole approach for independent energy producers. It was not more money to Eskom. Eskom had always been implementing the integrated energy grant which was for infrastructure at municipalities which did not have capacity. There were no problems with how Eskom performed that function.
She responded to the question about coalition of political administration. That was a difficult question to ask an official. That issue was in the political realm and Treasury believed that political problems required political solutions. There was no way Treasury could do that. Treasury only used blunt instruments. For example, if governments were misusing the money it would remove the money. Treasury intervened if councils were not able to do their jobs. For Treasury, it did not matter if it was a coalition or not. The issue was whether the administration delivered services to the people. If they did that then they would manage the municipality well. If not, there would be mismanagement and Treasury would intervene. Treasury was worried about the coalitions and the instability that was there. It was a serious concern. Given that metros were platforms for economic growth, it was a big worry. She hoped that there would be political answers to those questions.
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, responded to the question about why Treasury was still using 2011 census data. Concerning the provincial equitable share and the local government equitable share, Treasury used very little 2011 census data. Most of the survey data that Treasury used was based on survey data and not the 2011 census data. For example, with the provincial equitable share Treasury looked at mid-year population data of the previous year and did not use census data. When a census came out, Treasury either used that census data or it compared this against the mid-year population data that came out. Treasury did a collaboration between the two. The following year Treasury would again use the mid-year population estimates. Stats SA updated the population statistics every year. For the provinces it was quite easy because the data was broken down per province. With respect of the other data Treasury did not use census data. Treasury used the latest survey data that was regularly updated. In the provincial equitable share, there was very little date used from the 2011 census. Treasury tried to use the most reliable, up-to-date data that was available. That was the principle that underpinned both the provincial equitable share and the local government equitable share. She said the same applied to the local government equitable share. The largest component within the equitable share component was the basic services allocation. It was based on the number of households below a poverty threshold that needed to access services. Treasury updated the cost aspect of the services, which was taken into account on an annual basis. Treasury updated the household data as well. It was collaborated between the 2011 census and updated with the community survey data. It was further refined with data that was based on provinces and worked back to the districts on an annual basis. That methodology Treasury developed in collaboration with Stats SA. When the new census data came out there would be a collaboration between the data that was currently used and the 2022 census results. The data would be fixed and then the data would be updated annually. The only issue Treasury could not update in the local government equitable share because there was no survey data that was reliable enough to do that was the poverty component. It was the number of households indigent. It was not all households that had access to services. To update the number of households that were indigent was where Treasury used 2011 census data. The number of households was updated every year. Treasury strived to use the most updated data to ensure that allocations were as fair as possible.
The Chairperson said that the issue of indigent households was important. If Treasury used 2011 numbers, that may be problematic. Was there any possibility of using recent statistics to extrapolate what happened instead of relying on the static numbers of 2011 as far as indigents were concerned?
Ms Fanoe responded that even census data struggled to measure poverty. The measurement of poverty was very difficult. That was why survey data could not be used. She noted that post-Covid that question became more difficult to answer. With the economic decline due to Covid, poverty deepened in the country and how it would impact on the poverty numbers was an issue that was quite key to the question. Unfortunately, Treasury could not use survey data. It was something that Stats SA was fully aware of, and Treasury was working with them. Stats SA was also getting smarter with statistical methodologies. As soon as it got a methodology that could update it on a more frequent basis then Treasury would definitely do that. Treasury would be exploring how it could best measure poverty. With regard to the provincial equitable share formula there was a poverty component. Treasury would look at how it currently measured it and whether there were better methodologies out there to measure poverty. She noted that the small business allocation was not a division or revenue issue. That was a National Government issue, and it was something that would come up during the Appropriation Bill discussions and should be dealt with there.
Ms Ogalaletseng Gaarekwe, Chief Director: Provincial Budget Analysis, National Treasury, responded to the question by Ms Peters about whether provinces still picked up hospital fees. Yes, provinces did. It was one of Health’s main revenue source. Hospital patient fees may just constitute 7% of the total provincial own revenue. In the current financial year, there was a provincial own revenue adjusted budget of R20.7 billion. Of that, R1.4 billion was from patient fees. Looking over the performance to this point, provinces had only collected 55% because they did have problems with collection. That affected payments to provincial departments of health. Health would say that revenue collection was not their main purpose as a department. They were there to provide health services. Provincial treasuries had been pushing them hard to collect more. Provinces could probably collect more than R2 billion if they put more effort into it. The challenge has been that they did not have enough staff, especially on revenue because the clerks dealt with this. In most instances, manual systems were still being used. That also affected revenue collection. That was where the challenge lied.
She discussed the issues around the conditional grants and due diligence. Due diligence was done as Treasury implemented the budget. With regard to provincial conditional grants, Treasury monitored monthly and received monthly reports from all provincial departments. On a quarterly basis there were sector meetings where Treasury met with a specific sector, invited provincial colleagues, and went through each grant to see where the challenges were. It would be seen whether the National Treasurer and the sector would be able to provide assistance with regard to the challenges that were being experienced. Support was provided to provinces in terms of conditional grants. Performance of provinces had improved over the years. Most of the time more than 90% of the budget was spent. The provincial sphere of government tended to do well in terms of infrastructure performance. The same would apply to the issue of baseline. Treasury did monthly monitoring. On a quarterly basis Treasury reported Section 32 of provincial spending. Treasury had budget visits where it met with provinces. With virtual meetings now, Treasury was able to meet provinces more often because it did not need to travel to them. Virtual meetings were more advantageous. Treasury also checked how delivery was going on the ground at the projects.
On fiscal dumping in the provincial space, it was something that limited to the issues around the human settlement development grant. Towards the end of the year, or the last three months of the year, they would transfer money that was not spent to the Housing Development Agency to deliver on their behalf. That was the challenge at this moment. Treasury was trying to find ways of having provinces surrender that money back to the National Revenue Fund. Essentially provinces had not committed those funds because the division of revenue and PFMA was clear that that money needed to be committed. If the money was not committed it needed to come back to the National Revenue Fund. Treasury was still battling with that where money was transferred to municipalities and how to get it back to the National Revenue Fund.
She discussed the SOCs in provinces. In provinces there were normal entities scheduled in terms of the PFMA. There were 56 of those entities. Those entities were like the gambling boards which collected revenue and casino taxes. There were liquor boards which collected. In the past there was an agreement that provinces would try and rationalise these entities. For example, the merging of the liquor board and the gambling board because they did similar work. In some provinces that process was slow, like in the Eastern Cape and KZN. In other provinces, like Gauteng, Mpumalanga and the Free State, there were already those merges to reduce the number of entities. There were also the business enterprises and there were 17 of them. These included the special economic zones. They were fairly okay but there were those that were too small that needed to be merged. There needed to be a clean up of entities to ensure that others would be able to sustain themselves. These entities were not supposed to get funding from the State because they were meant to be self-sustainable. The transfers to those had drastically reduced. Only when they were given certain projects, for example with broadband. The Limpopo Economic Development Agency was asked to run certain projects for the province to ensure that there was broadband within the province and rural areas. Only in those cases where they given funds, funds were given to the entities that ran projects on behalf of certain Departments. There was also monitoring that Treasury required provinces to submit on a quarterly basis so that it saw how the entities were doing. Most of these entities had been hit hard by Covid. The gambling boards were hit hard because they could not collect the revenue they were meant to. Tourism entities had also been hit hard.
Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, National Treasury, discussed the issue of consultants. National Treasury had issued the cost containment regulations that was applicable to national, provincial and municipalities. Treasury engaged with municipalities on the numbers when they reported and met with Treasury. There was the technical part of the operations where they drew heavily on consultants. Treasury did not think a point would be reached where the use of consultants would be completely eliminated.
He discussed the organisational structures. This was largely the competency of COGTA and SALGA. They had both done extensive work on designing the organisational structure fit for purpose in the different type of municipalities. Treasury observed in many of its budget assessments that the organisational structure was bloated and as a result not a lot of money went to core services. In terms of the norms and standards that Treasury had issues in circular 71 there was a ratio that it asked municipalities to adhere to at all costs. National Treasury had done extensive work on the budget and treasury office. This was where the CFO and its finance teams were located. That work would soon be issued to municipalities to assist them to get uniformity. If there was no proper finance department, with capable people to assist with the budget, monitoring and implementation, then the institution would be weakened.
He discussed the indigent register. The equitable share that was referred to on slide 20, is for money that had been set aside to subsidise services to the poorest of the poor. When Treasury assessed the budgets of municipalities, he had not seen one municipality in South Africa that put in their budget the exact amount that Treasury subsidised. The municipalities were supposed to have an indigent policy and register. Every municipality that Treasury engaged said that they did not have sufficient money, but it was found that they did not allocate. This was one of the checks that Treasury did religiously. What was in the Division of Revenue Act for direct grants had to be in their budgets. It had to be appropriated before it could be spent. The point was that they did not necessarily put in the exact amount. It was always less. Treasury often asked them why they were not appropriating the exact amount that had been set aside for this in the budget. Historically, Treasury could not monitor this but because of the reforms that it had facilitated it could now start to track that. If there was R100 in the Division of Revenue Act for the equitable share then in the budget there needed to be R100. Going forward, Treasury should be in a position where it could see the cent what municipalities used the money on. He noted that the way the MFMA and PFMA was designed was that the first line of accountability was always with the Department, the province, or the municipality. They needed to use the provisions in the Act to monitor their own performance. In the MFMA there were certain responsibilities assigned to the mayor. Monthly the mayor needed to consider the financial reports. That same information was reported to Treasury monthly. At the national level, Treasury published the financial results for National Departments every month. Provinces reported every month in terms of Section 32. Municipalities reported every month in terms of Section 71. Quarterly, Treasury consolidated that information so that was the financial information that it tracked including conditional grant performance. That information Treasury published religiously on its website. It was there for the public, but it was also there for this House to engage with. If there was a need for Treasury to explain this to the Committee, then it would be quite happy to do that.
The total amount that municipalities had provided a service but had not collected the money was now R261.5 billion. Of that, organs of State owed R18 billion or 7.5%. That number needed to be zero. The second number was business. It currently stood at R55.2 billion or 20.7%. That number needed to be zero. Every municipality, across the country, needed to enforce credit control. Leading up to the elections, there had been some strange behaviour. He did not want to put himself in an awkward position to explain the reason behind that. The members knew what happened, politically, in the lead up to the elections.
Households owed R182.4 billion which was 69.7%. Of the R261.5 billion, 41.6% was within the 30-to-60-day period. That was not a concern. The effort municipalities needed to put in was to collect the historically owed amounts. This was where there was a political oversight committee and there was the committee the Deputy President chaired to assist Treasury to deal with the Eskom historical debt as well as water boards. Treasury issued two budget circulars every year to guide municipalities when they prepared their budgets. The first one was in early December and a week after the national Budget. Treasury would issue the second one. He encouraged members to find it on Treasury’s website and read the circulars. The procedure that municipalities needed to follow to give effect to the division of revenue was articulated in the March budget circular. It detailed, step by step, what they were supposed to do and what they were not supposed to do. Treasury had institutionalised this practice because of its monitoring system that if it detected that a municipality had unspent grants, it was not their money and had to be cashed back. If Treasury transferred R100 and municipalities spent R80 then there needed to be R20 in the bank. Treasury then looked at the financial statements. If it could not find that R20 then the money would be recalled. That practice was institutionalised over the last eight to ten years. There was no municipality in the country that should say they had not been trained. They have been trained and educated on how this practice worked. In the early years, Treasury met with all the municipalities on grants twice a year. Today, Treasury did not meet with any of them. If the numbers showed that the money was not spent, and it was confirmed by the financial statements then Treasury would recall the money. On average that number was about R2 billion annually. R2 billion was recalled annually because of underspending. Treasury explained this through their circulars in detail as it had capacitated municipalities. The first line of monitoring was with the National sector Department. Treasury looked at the implementation of the Division of Revenue Act and made sure that whatever Parliament approved that it gave affect to that to the letter of the law.
He responded to the question about how Treasury could make the allocation when it knew that the municipality was not going to spend the money. Treasury had progressively reduced grants. Treasury had considered the actual performance. However, it was not in the interest of a community that they were penalised because of the actions of a municipality. This was where Treasury was trying to beef up its own ability to guide municipalities. Treasury was responsible for monitoring and oversight. Unfortunately, Treasury did not run municipalities, nor did it appoint the people who were in those municipalities. Treasury was doing monitoring and oversight and sometimes it was doing that with people who were earning three times a Treasury salary. On the one had municipalities said that they did not have capacity, yet they were paying their staff extensive salaries. Therefore, value for money was an important consideration. Treasury had done extensive work to improve its intervention framework. The Constitution was very clear on the hierarchy of interventions. There was Section 139 (1) (a), (b) and (c) that spoke of interventions in the sense of a directive. Section 139 (4) kicked in the moment a municipality was not in the position to adopt a budget as per the legislative framework. That with Section 139 of the MFMA came into effect. The MEC of Finance in the province had to get involved. There were a few examples of this in the past which meant that the province then took responsibility. When it came to the tabling of a budget, the municipality had the legislative deadline of 31 March to table the budget. The budget had to be adopted by the latest 30 June. If it was not tabled on time the law allowed for the council to meet every seven days. If the municipality missed the 30 June deadline, then the Constitution kicked in in terms of Section 139 (4). The province had to intervene and the MEC of Finance had to assist the municipality and by implication take over that responsibility. Treasury had done substantial intervention work and perhaps in the future it could share that with the Committee. Treasury had done roadshows across the country with the Deputy Ministers of Finance and COGTA so that it made sure people understood what the Constitution and the MFMA was talking about and how interventions should be done properly.
Ms Gaarekwe discussed personnel versus infrastructure. Provinces, as a sphere of Government, were labour intensive. Provinces had more employees than national. The majority of these employees were teachers, about 400 000. More than 300 000 were health professionals. This was personnel that contributed to service delivery. There was a growth in number over the past two years in health professionals. Because of the rising cost of personnel, the majority of the equitable share that provinces were using to fund conditional grants that were for infrastructure delivery was being shifted to where the pressures were on. That was the biggest challenge at the moment. The majority of provinces were relying on conditional grants for infrastructure delivery.
Mr Letsepa Pakkies, Senior Economist, National Treasury, discussed the non-financial census data that was released in early April 2021. It showed an underwhelming coverage. That was the data that was reported by municipalities. Of the 10.2 million indigent households that were funded from the formula, municipalities had only reported a coverage of 21.8%. This highlighted the issue that even through Treasury increased the funding to local government the level of prioritisation needed to be looked at. He discussed the costing. The costs that had been reported by municipalities that they had incurred in providing basic services was much lower than what Treasury currently provided for in the equitable share. It was only electricity where the spending was a bit higher. Even there it was a mere 65%. This illustrated that the cost factors that were in the formula to affect the allocations cannot be questioned. Municipalities were spending much lower to deliver services. Serious questions were to be asked around coverage.
Mr Bongani Daka, Senior Economist: Intergovernmental Policy and Planning, National Treasury, responded to the question on the public transport network grant and the impact of incomplete infrastructure that had been suspended. Treasury categorised municipalities that received that type of grant into three categories. The first one was municipalities that were operational that were actually transporting people using that grant. The second one was municipalities that were not operational but had infrastructure that was put in place already. The third category was municipalities that were planning and did not have any infrastructure in place. The three municipalities that were suspended were in the third category. They had been planning all along and did not have the infrastructure. The upgrading of a road was necessary but did not qualify as the city implementing The Public Transport Network Grant (PTNG). There was work currently underway where Treasury was going to look at how it can better deal with the suspension of cities. For the other cities that were not yet operational but there was infrastructure, Treasury kept funding these municipalities. Yet they had not transported a single person using this grant. The intended purpose of this grant was to transport people. Government should make a decision whether it should continue funding them in perpetuity or find a mechanism to suspend those cities even thought there was infrastructure. Currently, that money was paying for the consultants and not for the operation of transporting people. That was not acceptable. It should be noted that when a city was being suspended Treasury made funding available so that they could conclude any projects that may be outstanding. The National Department of Transport, together with the affected municipalities, would sit and identify projects that needed to be wrapped up in order to facilitate for the city to be suspended from the grant. Those municipalities that had been suspended so far did not have any infrastructure that was done for the implementation of the IPTN that was affected.
Mr Qayiso said that Mr Daka meant business. He raised the issue of the R200 billion allocated for small business. He had not heard anything on it.
The Chairperson said that that matter would be discussed with the Appropriations Bill. He asked Ms Gaarekwe to speak about the nominal versus real increase that she had spoken about.
Ms Gaarekwe said that had been spoken about where there were increases in real terms which meant that they were above inflation. That was what Treasury was using in terms of the numbers.
The Chairperson thanked the delegation from National Treasury for the presentation and engagement. Local government was a very important sphere of Government. This Committee had taken a keen interest into what was happening at that level. If Government did not get it right there then the monies appropriated will not have their desired outcomes as fall as inequality, poverty and employment creation were concerned. If there were any other issues the Committee would be in touch with Treasury.
Consideration and adoption of Committee’s draft minutes dated 15 February 2022
Mr Mathafa moved to adopt the Committee minutes.
Mr Qayiso seconded the adoption of the Committee minutes.
The Committee minutes dated 15 February 2022 was adopted.
Consideration and adoption of Committee’s draft minutes dated 16 February 2022
Mr Mlenzana moved to adopt the Committee minutes.
Mr Mathafa seconded the adoption of the Committee minutes.
The Committee minutes dated 16 February 2022 was adopted.
The Chairperson thanked everyone who attended the meeting. It was an informative engagement. The questions that were asked for clarifications will assist in the Committee making sure that there was proper service delivery at those levels of Government.
The meeting was adjourned.
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