2022 Division of Revenue Bill: Parliamentary Budget Office Input

Meeting report

Opening Remarks by the Chairperson
The Chairperson welcomed Committee Members and guests including the Parliamentary Budget Office (PBO) staff. He reminded Members that the Finance Minister had recently presented the Budget to the legislature. Following that, the Fiscal Framework was dealt with by the Standing Committee on Finance, and this Committee dealt with the Division of Revenue. The Fiscal Framework will then be debated in the National Assembly, followed by the Division of Revenue. Both Bills are then referred to the NCOP, where they will go through the same process through their Select Committees. He then asked the PBO to begin the presentation.

Overview by PBO Director
The PBO Director thanked the Committee for the invitation and for welcoming them to the meeting. He said the PBO team would go through the presentation.
 
Briefing on the 2022 Division of Revenue Bill by the Parliamentary Budget Office
Dr Dumisani Jantjies, PBO Director, stated that the Parliamentary Budget Office was established to support the Finance and Appropriations Committees in both Houses of Parliament with the implementation of the Money Bills and Related Matters Act of 2009. The purpose of this presentation was to provide an analysis of the Division of Revenue Bill to assist Members with their discussions on the Bill before adoption or recommendations.

National departments must monitor information on financial and non-financial performance of programmes partially or fully funded by an allocation in Part A of Schedule 4:
 -Submit a quarterly financial and non-financial performance report to the National Treasury within 45 days after the end of each quarter in terms of the applicable framework; and
- Evaluate the performance of programmes funded or partially funded by the allocation and submit such evaluations to the National Treasury within four months after the end of the financial year applicable to a provincial department or a municipality, as the case may be
2022 Division of Revenue
2022 estimates are 49.7% for national departments, 41.2% for the provinces and 9.1% for local governments. Equitable shares are projected to be 82% for the provinces and 18% of conditional grants for the provinces. Local government’s conditional grants are expected to be 58% and 32% for equitable shares.

Situation Analysis
Ms Sbusisiwe Sibeko, PBO Financial Analyst, in her presentation of the situation analysis, noted that Social Protection and Safety and security are the two largest expenditure functions of the national sphere of government. At the end of September 2021, there were 18 439 185 social grants paid to 11 431 843 beneficiaries. Social Development estimated that approximately 13.2 million people will be eligible to receive the special Covid-19 SRD grant in 2021/22: 5 853 661 beneficiaries based on previous grant recipients as of 31 March 2021; 7 360 011 caregivers: During September 2021 there were 13 787 072 applications for the second phase of the Covid-19 Social Relief of Distress (SRD) grant of which:  8 836 723 applications were approved. 7 385 206 grants were paid, and 69 355 applications were received from asylum seekers.

Situation Analysis, Local Government
Mr Tshepo Moloi, Economic Analyst, PBO, noted that local government plays a critical role as the first line of interaction between citizens and government. There were 1 225 service delivery protests between the years 2004 and 2016. Dissatisfaction with service delivery has often been cited as the reason for the increase in service delivery protests within South Africa. The non-financial census of municipalities (NFCS) Report for 2019 shows that: Consumer units receiving free basic water declined by over 1 million in 2019 compared to 2018. Consumer units receiving free basic sewerage and sanitation in 2019 decreased by 645 866 compared to 2018.
132 303 fewer consumer units received free basic electricity services in 2019 compared to the year before and at the same time, millions of households are faced with a trade-off between buying food and paying for municipal services.

Structure of the division of revenue
Mr Rashaad Amra, Economic Analyst, PBO, stated that the national share includes conditional grants to provinces and local government, general fuel levy sharing with metropolitan municipalities; debt-service cost the contingency reserve and provisional allocations. The provincial share: 28.4 per cent of main budget expenditure. Local government share: 4.4 per cent of main budget expenditure.
Funding structures of the different spheres of government
-Provincial equitable share: 82.2 per cent;
-Provincial conditional grant: 17.8 per cent;
-Local government equitable share: 58 per cent;
-Local government conditional grant: 31.9 per cent;
-Fuel levy: 10.2 per cent; and
-To note that the division of revenue is not a total reflection of local government spending.

Discussion
Ms D Peters (ANC) thanked PBO for the presentation. One of the consistent questions that need consideration before passing the Division of Revenue Bill is whether it effectively addresses the disparities across the provinces and municipalities. It is important to note that when SALGA gave their presentation, they also indicated the challenges they and the municipalities are encountering in the collecting of revenue. In addition, could the PBO state if they think the municipalities and provinces would ever raise enough revenue to augment provincial and municipal allocations from the equitable share. Provinces raise revenue from patients' fees and motor licenses which is not enough to sustain the services which the provinces are collecting revenue for. On slide 13, there is an indication of the number of children accessing ECD; does it correspond with the number of children in the cohort of the population? We know there is a target of 3.4 million children to have access to ECD by 2024; is this target consistent with the number of children in this cohort?  Slide 20 states the changing shares of the division of revenue from 2008/2009 including the debt service costs. Is the PBO aware of how much each sphere of government accounts for the overall debt that the country has? How indebted are the municipalities especially the metros? How much of the 2022 Division of Revenue Bill allocation will be directed at servicing debts? The PTMG was created to ensure that municipalities could deliver reliable, affordable, and safe public transport in 13 municipalities as a start. How possible is it that municipalities such as Mbombela, Polokwane, eThekwini and Rustenburg could spend 100% of their grant yet no passengers are being ferried?

Mr A Sarupen’s (DA) question was on the equitable share of the division of revenue to the provinces. The final report from the provinces indicates that they overspent their budgets by about R20 billion as a result of the previous year's equitable share reduction. Could the PBO inform this Committee about whether the equitable share increases to provinces would be sufficient to ensure they meet their mandates? Has the PBO identified areas where the national government could cut costs to prioritise protecting frontline services?

Mr O Mathafa (ANC) asked, given the statistics of passenger uptake reflected in the presentation, can we say that public service transport equates with value for money in terms of what it seeks to achieve? This is because in some of the cities highlighted, there is only an uptake of 1% of the population in public transport except in the City of Cape Town which has an uptake of 3% which has the highest customer uptake. Do we then have to look at other modes of transport to increase passenger uptake? On the lack of capacity in local government level in the implementation of projects related to conditional grants: in terms of DORA, there is an increase in expenditure but are we seeing an increase in infants trying to raise this issue of lack of capacity in the local government sphere? Could the PBO tell us if the DORA in its current state will be responsive to the growing trend of municipalities falling into debt, not being able to raise funds in the commercial markets? Do they see the need for government intervention?

Mr Z Mlenzana (ANC) asked the PBO if this budget was needs-based, or was it based on merely juggling numbers and still based on the baseline mentality. Is the Committee advised to adopt this budget because it addresses what the Committee has been advocating which is a budget that addresses the needs of the community instead of statistics?

Mr X Qayiso thanked the PBO for appointing young persons who would sometime take over the reins from the present leaders. The concern was expressed on the issue of life expectancy and child mortality rates which should not be taken as mere statistics. The aim of their inclusion by the PBO is to send a particular message and as a result, it is suggested that an interaction be initiated with the Department concerned. The report warrants consequence management procedures are undertaken to stem the decline. The household survey was suspended due to fiscal consolidation. What are the consequent results of this action in the future especially for the PBO? This survey is very important for planning purposes. On underspending, it is totally unacceptable that conditional grants meant to assist the very poor going through unprecedented hardship are still unspent. This Committee has to look into this matter as a matter of urgency. Could the PBO explain what has been the impact of Fiscal Consolidation on household consumption and the economy as a whole?

Mr A Emam (NFP) was not happy that the same question asked for many years persisted. What has happened after identifying weaknesses and the challenges being experienced, what are we doing in turning these problems into solutions? These are getting progressively worse over a period of time. What is the view of the PBO on ensuring a more transparent process of procurement in all spheres of government? To achieve this, the government must know about every procurement undertaken and it has to be published in the local media.  Such publication should make clear what contracts were issued, the value of the contract and the price per item. The country continues to lose billions of rand through procurement irregularities. People are raising eyebrows all the time because of the level of corruption being perpetuated through procurement. It is shocking to see the state of eThekwini today. They have no money to even pay the security in the entire beach area which is a tourist attraction. The crime level, the streets, the non-supply of water are shocking. One of the reasons for this deterioration is the lack of consequence management. Even though we have been speaking about zero-based budgeting the issue is if we have the capacity to implement this in the different spheres of government. Another big issue is irregular expenditure. Because there is provision for it, they abuse it and then regularise it as well. Does the PBO think we should continue to have the provision for irregular expenditure? Municipalities are disconnecting the services of debtors. ‘What is the view of the PBO when this matter is reversed? Do we have the right to demand the payment of services not provided? An instance is municipalities demanding the payment of rates and taxes when the streets are unclean, unsafe, full of potholes etcetera.

The Chairperson appreciated the presentation by the team PBO. On the revenue raised at local level, Mpumalanga and KZN are mostly dependent on coal. What do you think the transition to clean energy will be in the capacity of those towns to raise their own revenue? In your assessment, is enough being done to ensure that capacity is not undermined? Are the perennial unemployment, poverty, and inequality a result of the budget or DORA or are their other variables contributing and if so what are they? You suggested that some indigents do not receive what Parliament has approved, what is the reason for that? Local government is allocated 9.8% of national revenue plus other conditional grants, which means that 9.8% is not a true reflection of the money local government receives what do you say to that? Are the conditional grants given to them serving their purpose?

PBO Response
In response, Dr Jantjies said that the PBO will try and answer the questions posed, and for questions they are unable to answer today the answers will be sent in writing to the Committee. He upheld that there is a need for further discussion on local government and the Fiscal Framework because that will uncover available resources and what needs to be done as it will raise questions such as that of capacity and governance issues. One study undertaken by the Appropriations Select Committee on Revenues for Local Government found that metros have huge capacity to raise money compared to smaller and rural local governments. More discussions certainly have to take place. On ECD stats, 2021 data shows 5.7 million children within the ages of 0-4 years stay at home compared to those at an Educational Institution. On budget cuts, there needs to be a reflection on the cuts in comparison to our aspirations. There also seems to be a worsening of human development indicators.

Dr Nelia Orlandi, Deputy Director, PBO, explained that the exact division in terms of the DORA shows after calculating the shares that the national sphere is allocated 67% of the entire budget available for division. The provincial allocations are 28% while local government received 4.4%. But then on a national level, they do another sub-division in terms of the conditional grants because the 67% includes the conditional grants that are allocated to the provinces and local governments including the debt service costs, the general fuel levy and the equitable share that will be further sub-divided to local government. Initially, this is how the DORA allocates funds. Further slides illustrate that 67% of the national share is being divided again and the remaining proportion at the national level is 49% after transferring funds in terms of the conditional grants and the equitable share to the local governments. So if the conditional grant is included on the provincial level, it amounts to 41%. A proportion of that comes from the national sphere of government. The provinces receive 41% which includes the conditional grant and the equitable share. Within this 41% the provincial government receives 82% - a small proportion for social in terms of the equitable share formula - which is allocated in terms of the equitable share which mainly funds education and health.  And then the normal conditional grant for provinces is mainly for education, health, transport, and agriculture. Local government after they have received their conditional grant, the total amount that they receive from the main budget without debt service cost is 9.1% within which minus debt service cost is allocated in terms of the equitable share which is mainly used for providing free services for vulnerable families: and 31% of that 9.1% is allocated for conditional grants. These amounts are then transferred from the national sphere of government to provincial and local governments.

In the next Slide, 69% of the provincial sphere are actually transferred from national for equitable share and conditional grants and to other institutions such SOEs, NGOs or universities for example. This tells the story of the breakdown of the shares from the initial allocation in terms of the division of revenue. In our discussions with National Treasury on the division of revenue, one of the officials indicated that the money was not used for the purpose of the equitable share, and going back to the database to look at the structure of the municipal budget, it does not provide for the transfer the municipality receives from the National Department of Water Affairs for a specific grant. It is almost like all the money is transferred from all the national departments, provincial departments and National Treasury is received in one item. The name of the item is transfer received. He said it was obvious that it lost its purpose if it was transferred to the database. The money that is transferred in the database of the municipality loses its purpose. How then does the Municipal Manager know for instance that these R10’s that were received for water and sanitation must be spent on water and sanitation?

Dr Seeraj Mohamed, Deputy Director: Economics,  PBO, said the AGSA has pointed out serious service delivery problems with the local government as less than 30% of the municipalities are submitting credible financial statements for audit in their 2019/2020 financial year report. They said 126 municipalities equivalent to half of all municipalities adopted unfunded budgets. The question is why - despite the adoption of regulatory frameworks - the municipalities are still struggling to satisfy basic service needs. The challenges faced by local government are systemic but perhaps they are based on realistic assumptions that were made and designed by the funding models way back in 1998 in the White Paper on Local Government. Research has shown that the amount of revenue they (Local Government) could raise was overestimated. It was assumed that they could raise 70% of their requirements and these are an accumulated impact over a long time and thus causing budgetary transfer to local government to be inadequate. On why indigent households are not getting services; this is because local governments provide these services to households that are registered as indigent and are approved by the local government. The criteria identifying these indigent households seem to be dysfunctional. Also, the money that is transferred is not spent on these households that are not signed up as eligible and so end up being spent on other things - this factor is not well established, and more research is needed. Looking at all the factors that affect the economy and how that impacted different households in the country, National Treasury mentioned that fiscal consideration has been a factor in constraining GDP growth.

Ms Sibeko added further that the area of Early Childhood Development should be looked at critically. Members can recall that last year relief funding was announced that could save the ECD sector as 15% of this sector was at risk of closing shop. Some reports also noted that only 36% of that money was delivered to the ECD centres. Thought is being given to how many learners will be eligible in this cohort and the impact Covid-19 has had on this sector because there will definitely be more learners in the medium term. Before the budget, it was estimated that about R300 million would be returned to the National Treasury which had not been allocated to the ECD centres that are in dire need. One knows how critical ECD is to unpaid care work. On public transport and the value for money question; it is a matter of for whom the service is provided because value for money is necessary for people who do not have access to a large public transport system. If one looks at the Western Cape and MyCiti and its routing, it does not go to Khayelitsha where one might have higher value for money. In terms of the general household survey data, this is a critical concern because a number of surveys would be discontinued and this has massive ramifications for data-led policy-making as well as oversight. This is because when one looks at the local level and to determine who has access to electricity etcetera, one would be unable to have this data anymore. They have suspended the survey completely but the detailed version of the survey. On life mortality and life expectancy, one has to look at it geographically as it has implications for why life mortality is higher and lower in certain areas. In the Western Cape, for instance, low birth weight is largely experienced in children who are Black and are birthed in the urban areas. The solution then would be on how one can position pregnant women with better access to nutrition, money, and income. The solution here will certainly be different. Overspending and underspending are areas of concern. Over R6 billion was underspent by the municipalities which were reverted to National Treasury while at the same time some other municipalities were overspending their budgets. What should be asked is what the net effect is when these elements are occurring simultaneously. 

Mr Moloi re-emphasised the need for a rethink of the funding model, particularly with regard to the assumptions that were made in the 1998 White Paper on Local Government. A huge part of the challenges identified has to do with the systemic problems as it relates to the funding structure that was put in place. On comments about the state of municipal finances, National Treasury has indicated that the total debt owed by municipalities is about R261billion, and of this total figure, households account for a big chunk of it. This indicates that poor households are struggling to pay for the ever-increasing service charges. The conversation about unpaid bills and poor revenue collection by municipalities should be considered in the broader context of the country's microeconomic poverty, higher unemployment, effects of apartheid and corruption. If these systematic financial and operational challenges are not addressed, government will be setting up municipalities for failure. The norm has been to lay the blame at the door of local government and present them as incompetent, corrupt and inefficient; but the broader question to be asked is why this functional system persists.

In conclusion, Dr Jantjies noted that the study done on The Study of Local Government Revenue last year showed that the change in business activity in an area has an effect on the ability of the municipality to fund its expenditure. This raises questions about the fiscal framework of the local government. Clearly, there will be new industries, but what does that mean for the revenue that is seen as crucial for local government service delivery. The point being raised is that the challenges in intergovernmental fiscal framework are inherent in the system that exists. Looking at the literature, the point raised at the NCOP last week was that the system of government here has inherent limitations.

The Chairperson thanked the PBO for the robust engagement and declared that this ended the Committee's engagement with PBO. The Committee will now deal with internal Committee matters.

Minutes

The minutes of 24 February 2022 was adopted without amendments.

The minutes of 01 March 2022 was adopted without amendments.

The Chairperson reminded Members of the preparations for an oversight trip to Gauteng and asked the Committee Secretary to provide them with all the information they required for the trip.  

The meeting was adjourned.