The Committee convened on a virtual platform to be briefed by National Treasury on the Division of Revenue Bill.
Treasury took the Committee through the 2022 Division of Revenue Bill. The presentation focused on all three spheres of government, national; local; and provincial. It outlined the different budget aspects of the three spheres and indicated the allocation of budgets to the various spheres. The presentation also outlined the changes made to the Bill clauses and schedules.
Treasury shared that the national share of revenue declines at an annual average of one percent. Transfers to provinces increase at an average annual rate of 1.4%, also indicating that conditional grants grew faster than the equitable share. The presentation looked at the redistribution of the division of revenue, indicating that the per capita allocations to provinces in the 2022/23 financial year were higher in the Northern Cape with 11.5% average equitable share per capita, and 3.7% average conditional grants per capita.
The report also looked at municipal revenue collection in the financial years of 2018/19, 2019/20 and 2020/21. National Treasury indicated that revenue collection increased gradually from 2015/16, and this continued into 2020/21. Due to the pandemic, municipalities had anticipated substantial decline in revenue collection in the year 2020/21.
Provincial equitable share grew at an average annual rate of 1% whilst conditional grants grew at 3.3%. The presentation highlighted the restoration work being done within provinces to ensure that the necessary work is being done with provinces. Extensive technical work was carried out in 2019/20 to redesign the risk-adjusted index of each province. Changes to the provincial conditional grants included the move of the Early Childhood Development programme from the Social Development to Basic Education. R1 billion will be added to the Health Grant to support initiatives made by provinces.
While the Members welcomed the presentation, they raised their concerns regarding some of the points made in the report. They were concerned about the backlog for school grants, and they asked what National Treasury’s role is in ensuring that money is spent through proper channels. They also asked if provisions are being made for the money that continuously remains unspent in the fourth quarter.
Members noted that there was an allocation of R15.6 billion for the Health Department to fund the COVID-19 responses. They asked for a breakdown from National Treasury on the amount spent since the advent of COVID-19 on the Department of Health. It was evident to them that, from the oversight visit made by the Committee, most of the hospitals and clinics all over the country are falling apart. One would assume that funds were not allocated and used accordingly. Hospitals needed to be upgraded to a specific level of competence to help mitigate the COVID-19 pandemic.
The Chairperson opened the virtual meeting and welcomed all the Members as well as the chairpersons of the provincial legislature committees. She acknowledged the presence of the key stakeholders, National Treasury, led by Deputy Director-General: Intergovernmental Relations, Ms Malijeng Ngqaleni. She outlined the agenda for the meeting.
She noted the presence of the Financial and Fiscal Commission (FFC), Congress of South African Trade Unions (COSATU) and the Parliamentary Budget Office (PBO). She took a roll call for the Members from each province. The Eastern Cape and Northern Cape submitted apologies; an apology was also received from Chairperson Makaringe of Mpumalanga. The Chairperson also noted the presence of the legal advisor to the KZN finance portfolio.
Briefing from National Treasury
The National Treasury delegation was led by Chief Director of the Intergovernmental Relations Unit, Ms Wendy Fanoe. She indicated that she will be taking the Committee through the 2022 Division Revenue Bill [B6- 2022].
She said the presentation would consist of four main parts. Annexures would not feature in the presentation but could be made available upon request. These include the recommendations made by the FFC and those by the Committee. She highlighted that the presentation would deal with the overview of the 2022 Division Revenue Bill as well as the provincial government allocations, including the updates on the reforms made in the provincial equitable share. The presentation would also highlight the changes made to the health component.
The national share of revenue declined at an annual average rate of one percent. Transfers to provinces increased at an average annual rate of 1.4%, with conditional grants growing faster than the equitable share. She highlighted that, in 2022/23, national departments are projected to receive 49.7% of the percentage share allocation, while provinces are at 41.2%, and local government at 9.1%. The largest injection in terms of local government was equitable shares, which were at 75.7% in the 2021/22 financial year.
She touched on the redistribution of equitable shares, indicating that the Northern Cape had an average equitable share per capita of 11.5%, and the average conditional grant per capita was 3.7%. In comparison, Gauteng had the lowest average equitable share of 7.6% and 1.7% average conditional grant.
She highlighted that the allocations to local government have grown at a higher rate than other spheres, receiving generous allocations – particularly national and provincial government. The declines in the 2019/20 financial year could be attributed to the fiscal consolidation measures that were introduced in the 2019 medium term expenditure framework (MTEF).
Revenue collection increased gradually from 2015/16, and the trend continued into 2020/21. Municipalities anticipated a decline in revenue collection in 2020/21, resulting from the effects of the pandemic. However, it was noted that revenue collection remained the same with no significant changes in the periods of higher restrictions.
The provincial equitable share grew at an average annual growth of one percent, while conditional grants grew at 3.3%. There were funds added to the provincial transfers to respond to the existing spending pressures. There were also updates on the provincial equitable share formula review. The PES task team previously resolved to prioritise the review of the health component together with National Treasury and the National Department of Health.
Changes to the provincial conditional grants included the transfer of the Early Childhood Development programme from the Department of Social Development to the Department of Basic Education.
Transfers to local government accounted for 9.8% of the nationally raised revenue, with majority of the local government revenues raised by municipalities through their revenue-raising powers. Overall direct allocations to local government grew by an annual average of 7.9% over the MTEF. The local government equitable share was allocated through a formula, which ensured fairness for all 257 municipalities. About R6.5 billion was allocated to assist with the administrative costs, while R9.7 billion was allocated to fund community services. There was emphasis that these funds were allocated to poorer municipalities. R64 billion was allocated to free basic services.
Substantive changes were made to the Bill clauses. There was clarification of the funding source for additional allocations to provinces and municipalities; the 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.
Mr D Ryder (DA, Gauteng) welcomed the increase of the proportion of national fiscus allocated to provincial and local government. He raised concerns about the move from direct to indirect grants. He said that the same is being repeated within the provincial sphere, particularly from the Education and the Health Departments. This, in fact, is not an increase from 9% to 9.8%, but rather a different way in which national government accounts for its expenditure. It is not a tangible change to the amounts of money the municipality can spend.
He also raised concerns over the budgetary review document in relation to the school infrastructure backlog grants. Every year, the school infrastructure grant remains unspent, and money is reappropriated into the adjustment budget. He said that it is important for the Committee to keep an eye on whether the money is being spent accordingly. Hiding the backlog grant into the infrastructure grant would take the focus away from catching up on the backlog, which government has to do. He suggested leaving the item as a stand-alone.
He said that there is meant to be a regional bulk grant, and he noted that there has been a slight increase in that regard. Based on previous discussions with Human Settlement, he believes that regional bulk infrastructure grant requires a lot more focus.
He welcomed the review of the equitable share. He said that also welcomes the hoe-work done by National Treasury on the questions raised in previous meetings. He requested a provincial breakdown per capita of the equitable share.
He commented on the fact that certain municipalities were using the equitable share, linked to funding services for the poor as a means of subsidising services across the board. He said that this creates a false economy. He asked if there is a study that can be done in this regard, and in turn, a regulation could be put into place stating that the equitable share is to be used mostly to fund the needs of the poor.
He welcomed the move of the Early Childhood Development funding from Social Development to Basic Education.
He highlighted that the Committee had been requested to recommend that, once the 2022 Division of Revenue Act is passed, the amended framework is to be gazetted in terms of section 51 of the Act. He said that the request cannot be made without presenting the amended framework in full to the Committee. He asked for the document to be circulated to the Committee Members.
He commented on the substantive changes made to the bill clauses. He said that his biggest concern was around the smoothing out of expenditure. The Committee had previously expressed concerns in terms of the capital expenditure of municipalities. In the first quarter, there is usually low spending; quarter two ramps up slightly, and the third quarter might also increase. In the fourth quarter, 50/60 (80%) of the allocated budget is spent on capital expenditure. One of the reasons given for the rush in spending was that municipalities are not being allowed to spend money before finalisations. As a result of this tenders are not being advertised until the finalisations. Quarter one is always spent gathering the specs for tenders, and the tenders are only awarded in quarter two. He asked if there is a regulation that enforces the aforementioned, or has it become a habit.
Lastly, he commented on the latest memorandum that came from National Treasury, which put a freeze on all tenders because of the ruling by the Constitutional Court. It had caused massive problems in provincial and local government. Money is available to be spent, but the tenders cannot be awarded. He asked for a status quo from National Treasury regarding the matter.
Mr M Moletsane (EFF, Free State) said that there is an expectation that local government should raise their own revenue. He highlighted that it is not an easy task, given the conditions and challenges faced during the COVID-19 pandemic. He also said that it needs to be taken into consideration that the local government sphere receives the lowest budget allocation, yet communities rely on it to provide services for them. He said that it is important to revisit the distribution model.
He asked if the allocation is addressing the needs of the three spheres, especially the local government sphere.
Mr F Du Toit (FF+, North West) noted that there was an allocation of R15.6 billion for the Health Department to fund the COVID-19 responses. He asked for a breakdown from National Treasury on the amount spent since the advent of COVID-19 on the Department of Health. He said that it was evident, from the oversight visit made by the Committee, that most of the hospitals and clinics all over the country are falling apart. One would assume that funds were not allocated and used accordingly. He added that the initial argument was that hospitals needed to be upgraded to a specific level of competence to help mitigate the COVID-19 pandemic.
He commented on the additional R1 billion to assist provinces on the roll-out of the COVID-19 vaccines. He said that one would assume that the different rollout stations and initiatives as well as COVID-19 personnel have everything in place. He asked why there would be a need for an additional R1 billion for the vaccines. He also asked for clarity on what this amount would be used on. He asked why the money is not allocated to critical diseases or upgrades of certain hospitals.
Mr Y Carrim (ANC, KZN) commented on the distribution of the national revenue. He said that it does seem to be a fact that the national share of revenue is decreasing at an annual rate of one percent.
He re-iterated Mr Ryder’s idea about the allocation of money to other spheres, just with national control over the spending by strict conditions.
Transfers to local government are growing at an annual rate of 7.9% due to the inflations of the equitable share. If that is linked to other plights being made, the transfers from local to rural municipalities are more than twice as large. More rural provinces receive higher per capita for education than others. For the most part, the national government had been receiving the least negative increases in the 2021/22 financial year. One percent goes to the national sphere annually. It is true that it is not in terms of equitable shares but rather in terms of conditional grants.
He noted that this may not be an easy feat to solve, as there are no definite answers. However, while the committee is told that national and provincial government need to intervene more decisively to rescue local government, there is also an understanding that they should not be controlled based on having conditional grants and strict measures put in place for monitoring. Equitable share allows them to be more independent. He suggested that the national government should play a more active role in provinces and local government, if it means that conditional grants can facilitate that entry point for the national sphere and also avoid the local government not fulfilling its mandates through spending money allocated accordingly. He said that if conditional grants were to be increased more than equitable shares it would not be a bad thing.
He asked National Treasury if it is reasonable and fair to say that it is a more redistributive budget and revenue across all three spheres. He also asked if it is not projected over the next three-year cycle.
Mr Z Mkiva (ANC, Eastern Cape) appreciated the presentation from National Treasury, noting that it was an objective and thorough analysis in the manner that it was conducted in ensuring that work is being done within the rural communities. National Treasury is the anchor to the centre, and they are bringing the much-needed resources to the rural peripheries.
He said that the presentation was progressive, noting that it followed the margin lines outlined in the National Development Plan in (1) creating smart cities and equally smart villages, and that is a critical balance for a developmental state; (2) in investing the resources towards infrastructure, (3) in maintaining good infrastructure in the cities and (4) in developing good infrastructures in the rural areas. It thus needs to be commended.
In relation to conditional grants, he said that he would have appreciated if there were certain areas of special dispensation. He specified the issue of network/connectivity in the rural areas, which talks to non-availability of fibre and weak telephone signal. He said that some of these conditional grants need to speak to these issues, as they impact the educational centres such as primary schools, high schools, and some universities. This needs to be treated with a matter of urgency because it would systematically exclude rural students from certain opportunities that come with having access to technology.
He asked for clarity on the equitable share. He asked for a breakdown from National Treasury on how much of that goes into the wage bill. He understands that the wage bill should not exceed 25% of what is given. However, there are some departments that consider 90% of their budget on the wage bill.
The Chairperson appreciated the work being done by National Treasury. She also noted the recommendations taken to the NCOP.
She appreciated the budget speech for having considered the concerns and recommendations of the Committee.
She noted the increases in local government, particularly rural areas. She highlighted that the Committee, along with National Treasury, need to check perhaps if these are nominal or real changes.
The Chairperson asked whether the current increases in the rural sphere are coupled with the requisite capacity to manage such allocations, including strong oversight.
She said that she is unsure whether there is a change in the name of Cooperative Governance and Traditional Affairs. Throughout the presentation, there is reference to cooperative governance. She asked for the reasons for these changes and an update if there is any.
While the changes and increases in allocations are well received, she asked how the Committee would ensure value for money. Understanding that there are Portfolio Committees that are available to assist, she asked what the role of National Treasury is in this regard.
She asked if the increase in allocations would be able to assist municipalities that are financially distressed, as well as address the Eskom and water issues. She asked what needs to be done to counter the current issues of debt that are translating to current power outages.
The Chairperson said that they are aware that there are national departments that are currently owing. She also emphasised the importance of looking at the private sector as well, which contributes to the current Eskom issue.
She welcomed the move of the Oncology and Mental Health grant to the direct National Health Insurance (NHI) for provinces to do their own overview.
The Chairperson handed over to National Treasury to respond to the Members’ inputs.
Responses from National Treasury
Ms Fanoe indicated that the team from National Treasury was supported by Mr Jan Hattingh, Chief Director: Local Government Budget Analysis.
She responded on the issue of increases on local government, indicating that the equitable share comes from the unconditional grant. She said that conditional grants can be separated into two types of grants: (1) direct conditional grants, which go directly to municipalities and provinces, and (2) indirect grant,which remain with the national government and get spent on behalf of municipalities. She highlighted that the division of revenue presentation indicates that indirect grants are not shown as part of allocations that go to provinces; they are shown under the national share. The priority of conditional grants that go to municipalities are the infrastructure grants. The other grants are for the priority programmes such as the school nutrition programmes.
She highlighted that, regarding the school infrastructure grant, it had been identified where there is a legacy backlog to ensure that the funds are being used to bring the schools up to standard. When the programme started, schools in need were identified. Before any conditional grant was incorporated, a phased-out report was prepared, and submissions were made to the Committee. This report indicates the current backlogs, or any issues present for the provinces.
She indicated that the per capita details could certainly be provided easily by National Treasury, as this was done based on a previous parliamentary question.
Municipalities use the local government equitable share, and they do not just direct the indigent share. She said that this was quite complex. Regarding free basic services, there are various policies applied by the local government, and most municipalities have moved to indigent registers, where only the poor will get provision to these services. Non-poor households will pay a levy fee.
She said that there are three conditional grants in total that would require changes, and this will be done as soon as the meeting is over. The frameworks will be provided to the Committee.
She responded on the issue of smoothing out expenditure on the conditional grants: municipalities and provinces do have certainty and planning can be done. For this reason, National Treasury has a three-year budget process.
Mr Hattingh answered Mr Ryder's question regarding the S Curve. He confirmed that it is true that local government has very low spending in the three quarters. However, there are broader take-outs in the fourth and fifth quarters. The lockdown distorted the municipalities' ability to have the take up. This all depends on the way that planning is synchronised, and the project pipelined and managed. Local government has an accrual budget reporting.
Although a lot of time and planning has been spent in assisting the local government in their budgeting, it is only at the beginning of the financial year that the procurement plan starts. He said that this is something they intend on changing completely.
It is not 100% correct that the Division of Revenue Act is one of the reasons that there are delays. The financial year for local government is a quarter delay, and for that reason, National Treasury ensures that municipalities receive all the necessary transfers and allocations by the time budgets and planning are concluded. Budgets are adopted, latest by 30 June, and that could be used as a window period. This should therefore not be used as an excuse to assist with planning and cash flow management.
He indicated that National Treasury issued a guideline to municipalities in the form of a circular. This helps to assist the budgeting process.
The Department of Communication has a role in relation to connectivity issues. It has been identified by entities of government, such as SETA, to ensure that these issues are addressed.
The municipal budget consists of three aspects: equitable share, conditional grant, own-generated revenue and the current budget implemented. The overall employee cost was R133 billion, and the councilor remuneration stood at R4.9 billion.
Regarding the outstanding debt from Eskom and the Waterboards, he said that Treasury evoked Section 216 of the Constitution.
Mr Bongani Daka, Intergovernmental Policy and Planning, NT, suggested that the entity only provides the provincial allocation per capita, in response to Mr Ryder’s concerns.
Ms Zethu Ncube, Deputy Director: Local Government and Budget Framework, NT, said that it should be taken into consideration that the rural urban grant is the third largest; it should also be noted that it also grows at a significantly higher rate than inflation. She said that it is important to understand the nature of the grant – how it also funded projects of regional importance. A large number of these grants have an economic component, which should be funded from all revenue. In terms of funding the economic structure, it is not the only envisaged source of funding; the use of borrowing is also highly expected.
Mr Daka added that National Treasury admits that connectivity in rural areas needs attention. However, the Department of Communication and its entities have funding for these specific connectivity issues. He mentioned the ongoing Fiber connection project.
The Chairperson welcomed the responses from National Treasury, and requested for the report from the National Treasury.
Mr Ryder said that he wanted to follow up on the responses, as he noted that some of the responses presuppose that national departments have a higher level of governance, a higher level of capacity and competence than provincial and local government. He stated that this is not always the case. National departments have failed the locals.
The Chairperson asked for further clarity on the issue of the name change.
Mr Carrim agreed with Mr Ryder, in that the national government does indeed lack. However, overall, this sector generally has more strengths than many other municipalities. There are also more resources in this regard. National Departments have fulfilled more obligations.
The Chairperson went on to the consideration of the minutes from the meeting from 14 December 2021, 24 February 2022 and 01 March 2022. All the minutes were adopted by the Committee, without amendments.
The meeting was adjourned.
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