2022 Division of Revenue Bill: briefing

Meeting report

2022 Division of Revenue Bill

Ms Amukelani Xaba, Director: Provincial Budget Analysis, National Treasury, led the presentation.

The national share of revenue decreased at an annual rate of 1%
Transfers to provinces and local government increased at 1.4% and 7.9%, respectively.

The Division of Revenue is Highly Redistributive:
The tax base is concentrated in urban areas, and rural areas receive more per capita/per household through the 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 Allocations to spheres:
Allocations to local government have been growing higher relative to provincial and national spheres.

Municipal Revenue Collection:

Revenue collection has been increasing gradually from 2015/16 and this trend continued in 2020/21.

Substantive Changes to the Bill Clauses included:

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;
Finalise allocations to municipalities, schools, hospitals, and entities from provincial budgets.

Provincial Allocations

Update on Provincial Equitable Share (PES) Formula Review:
The PES task team is reviewing the PES formula, which includes National Treasury, nine provincial treasuries, and the Financial and Fiscal Committee (FFC).
PES task team previously resolved to prioritise the review of the health component – with National Treasury committing to work closely with the National Department of Health.
Extensive technical work was carried out in 2019 and 2020 to redesign the risk-adjusted index of each province. A workshop followed this.
Formula has been updated with the most recent data available.

Changes to PES Allocations:
The 2021 wage agreement included a once-off non-pensionable cash gratuity payment to all public servants in government.
R12.7 billion has been added to provincial allocations for the first two years of the Medium-Term Expenditure Framework (MTEF) to continue the Presidential Employment Initiative.
Additional funds were also added to the provincial equitable share to accommodate a set of spending pressures.

Changes to Conditional Provincial Grants:
Changes were made to the following grants; education, cooperative governance, health, transport, once-off gratuity, and disaster funding.
           
Correction to the District Health Programmes Grant Framework and Targets for Expanded Public Works Programme Expenditure (EPWP) Clarification:
District Health Programmes Grant;
EPWP Integrated Grant for Provinces;
National Treasury requested the Standing and Select Committees on Appropriations to recommend that the conditional grant framework and EPWP targets be corrected as part of the gazette issued in terms of section 15 once the Bill is enacted.

Local Government Allocations

Local Government Equitable Share (LGES):
Allocated through a formula to ensure fairness for all 257 municipalities;
Formula has updated data for household growth, bulk water, bulk electricity, and projected Consumer Price Index (CPI) for other costs;
The formula is fully funded to account for HH growth and cost increases over the MTEF.

Changes to Local Government Conditional Grants:
Creation of indirect component of the Municipal Grant
Application of non-financial performance in the in-year stopping and reallocation process
Municipal Systems Improvement Grant
Renaming of the disaster grant
Budget Facility for Infrastructure
Reprioritisations, technical shifts, and additional allocations.

See presentation attached for further details.

Discussion

Mr R Mackenzie (DA) appreciated the increase in the division of revenue for local governments. He noted increased revenue collection during the COVID period and wanted to clarify if this was due to spending or under the collection.

He asked how inflationary pressure affected the provinces and if there was pushback regarding the allocation of money compared to inflation. Concerning the section 16(5) requirement that Eskom and water boards return unspent funding, he asked if funding had been returned. If so, how much?

Mr Mackenzie wanted an indication of when Statistics South Africa (Stats SA) would conclude their count so that current data could be applied to the PES. He asked if there would be public participation in consideration of the PES formula.

He wanted to know what "data gaps” meant, how using data from the year before impacted funding allocation, and the amount given as cash gratuity. He asked if the “data gaps” were the responsibility of the provinces or the National Department of Health.

Mr Mackenzie asked if the incentive component delay was due to the provinces or the National Department of Transport. He asked for clarification on the cash flow component and the reduction allocation concerning transport funding.

Ms N Nkondlo (ANC) wanted to understand the practical effects of and the assistance provided by the clause expediting the spending of transfers funded by the contingency reserves for local and provincial disaster management.

She asked if the risk-adjusted index accounted for the influx of documented and undocumented foreign nationals who use public services. Ms Nkondlo asked in terms of the Presidential Employment Initiative if any discussions were had to extend funding beyond the allocated two years, given the demand for assistance in the health and education departments.

Regarding local government grants, she asked for a write-up on the focus of the Neighbourhood Development Partnership Grant (NDPG), information on the duration of the programme and the number of employment opportunities the allocated R1.7 billion would secure the City of Cape Town.

The Chairperson was concerned that the changes made by National Treasury did not account for previous budget cuts, inflation, and the cost of living. She asked National Treasury to include the previous, current, and next MTEF periods in future presentations.

The Chairperson said the national figures across all provinces were misleading and appreciated the consideration of provinces by the national government, but the figures provided did not relate to the Western Cape.

The per capita allocation in terms of the PES was lower for the Western Cape and Gauteng compared to other provinces. The Chairperson noted the reasoning by National Treasury for the allocation of the PES across provinces is contradictory and asked for clarification in this regard.

She commented on the impact of looting on the national government budget and that provinces were not receiving their constitutionally mandated equitable share.

She requested specific presentations on the PES review be given by National Treasury to the health and education committees in the Western Cape and the consideration of education factors in the upcoming review. The Chairperson asked how the ‘data gaps’ would be resolved; she was concerned with the operation of the census and its effect on the allocation of funds in provinces if not done properly.

She said that the Western Cape and other provinces were experiencing a locust plague, and the Western Cape has used R5 million of its own money to resolve this issue. She asked for an indication from National Treasury if funds would be made available to combat the locust plague.

Considering the increase in electricity prices and Eskom’s implementation of load-shedding, the Chairperson wanted to know why Eskom returned funds and if National Treasury could not reallocate the funds to provinces to assist in the procurement of Independent Power Producers (IPPs).

Mr G Brinkhuis (Al Jama-ah) asked if National Treasury had effective oversight measures to ensure the equitable distribution of funding across municipalities and districts in provinces, specifically the Western Cape.

Responses

Ms Xaba responded that the increases reflected in local government are due to support provided by National Treasury for service delivery which was not extended to the national and provincial spheres. The decreases reflected in the national and provincial spheres are due to fiscal consolidation and budget cuts to compensation. The higher growth rate in the local sphere is not the result of a high increase in additional funding.

She stated that the Chairperson’s concern with the lack of clarity on what the per capita share aims to reflect was an important discussion for National Treasury to put forward. The PES reflects many factors, not just ruralness; the specification of ruralness as a factor shows that the PES has a redistributive element.

She said the presentation provided a detailed breakdown of the allocation of the budget in the Western Cape. Changes to the baselines are presented in discussions with treasuries, stakeholders and Parliament. Considerations will be taken to do the same in this Committee as this would assist in providing a clearer picture. 

Regarding the Presidential Employment Initiative, she said that discussions had not been on making the grant permanent. The grant’s purpose was to provide work experience the youth could use to apply for other job opportunities.

Ms Xaba said this was an important discussion, as it is the best performing programme. But due to budget constraints, it was difficult to make accommodations. 

Mr Letsepa Pakkies, Director: Local Government Fiscal Framework, National Treasury, started with Ms Nkondlo’s question concerning the new provision that assists with responding to disasters. He said the new provision allowed the Minister to approve expenditure that could not be reasonably delayed without negatively affecting service delivery; natural disasters fall within this category. However, limitations were placed by the Public Finance Management Act (PFMA) on how the Minister exercised the new provision. Mr Pakkies noted that National Treasury was exploring how to use the new provision in response to the floods in Kwa-Zulu Natal. 

He said that other steps are visited before the new provision. The National Disaster Management Centre, Treasury and the Transferring Officers of particular grants could approve the reprioritisation of non-disaster related grants for disaster response; this allows for a fast response. National Treasury can only address disasters once the provinces have spent their funds on the current financial year.

Concerning increases in revenue and additional funding for local government: municipalities and provinces are constitutionally entitled to an equitable share. The additional funding was for service delivery and to subsidise the impact of the pandemic; municipalities were still expected to use their revenues to subsidise where national government could not reach and maintain infrastructure.

Regarding increases to bulk electricity and bulk water, National Treasury would have to subsidise the poor regardless of the performance of municipal revenues to ensure municipalities are not put into a predicament.

On the data from the grant system: National Treasury looked forward to the updated census data because both the LGES and the revenue adjustment factor require updated income data. He said engagements were had with Stats SA on National Treasury’s data needs to update their formulas regularly.

He commented on an agreement reached by National Treasury and the City of Cape Town about the cash flow projections and funding for the MyCiTi. The City of Cape Town, due to its capacity, asked National Treasury to reschedule and reduce allocations made for the MyCiTi Project until the City has the necessary capacity to undertake the project.

He said this was an example of how municipalities and provinces could conduct their business. Instead of holding onto funds that cannot be spent, an agreement can be made with National Treasury to receive the funds later. The agreement reached with the City of Cape Town would not impact the MyCiTi project, and the lifespan of the project is ten years.

Mr Pakkies responded that a write up on the Neighbourhood Development Grant in the business case was available. However, the information on specific cities that was requested was not available at the time, and the number of people who would benefit from the grant therefore could not be determined. The employment was not limited to the EPWP - all employment was targeted, and costs would vary from one municipality or project to another. The City of Cape Town was allocated 20% of the R1.7 billion whilst rest went to the other seven metros.

On Eskom and NERSA’s impact on the economy, municipalities and provinces: Mr Pakkies said the R50 million was channelled to the Department of Mineral Resources and Energy (DMRE) IPP office, which was ready to assist municipalities in the procurement of IPPs. A project that looked at the electricity business models in municipalities and accounted for the changes in the electricity landscape and climate change was underway.

The funds returned would still benefit municipalities through the IPP procurement plan. A diagnostic revealed that municipalities preferred to have a national IPP office in charge of this. The infrastructure grant that Eskom returned had nothing to do with Eskom scheduling load-shedding due to operational failures. He stated it was within national government’s rights to recall funds that had not been used as mandated.

Mr Kolisang Molukanele, Senior Economist, National Treasury, said that Stats SA had given no indication on when they would do; the new data collected by Stats SA would not impact the 2023 equitable share but rather the 2024 equitable share. He agreed with Mr Pakkies that Treasury looked forward to the census data, as it would impact the population data they use.

Mr Molukanele commented that the census data would be interesting as it would reflect population data that impact the distribution of the PES. No public participation was facilitated, but Treasury worked with the nine provincial treasuries and public comments shared in committee meetings, and public hearings can be sent to National Treasury.

He explained that what was referred to as “data gaps” was clinic and hospital utilisation data that was not reported in 2020 and 20201. This data was important because it provided Treasury with data on how many people utilise healthcare facilities. The lack of reporting was due to COVID. The facilities were responsible for reporting the data to the provincial health department, which would send it to the national department.

Mr Molukanele said that the influx of documented or undocumented foreign nationals was accounted for in the demand component seen on slide 10. A patient load data component used clinic and hospital utilisation data where these types of movements were seen.

In terms of the Chairperson’s request for a PES review presentation to the Education and Health Committees, he said he would take it back to the team and that the education component review had been presented. The changes made to the education component included implementing new data from the Learner Unit Record Tracking System and the media population estimates. The changes were made to capture the five-year-old to the 17-year-old population, as the 2011 Census data was too old.

Ms Xaba said she would investigate whether additional funding for locust plague relief was requested and asked Mr Pakkies to comment.

Mr Pakkies said he was unaware of this matter. The matter would have to be classified as a disaster to have funds made available. Once classified, an assessment of the funds needed to address the disaster must be sent to the National Disaster Management Centre (NDMC). Together with Treasury, they will determine how much money will be made available. He asked the Committee to provide more information on the plague so that he could follow up.

The Chairperson said that perhaps the National Department was why National Treasury had not received any communication on the locust plague. She asked if the Western Cape Treasury sitting in the meeting could assist.

On the oversight role of National Treasury ensuring funds are equitably distributed across districts and municipalities in provinces, Ms Xaba said the only oversight Treasury provided was through recommendations by analysing budget allocations in benchmark meetings, as municipalities and provinces made the final decision in terms of distribution. She also asked Mr Pakkies to provide information on the benchmark meetings.

Mr Pakkies said it was decided that the Budget Council would review all conditional grants in the political and local spheres, including the allocation criteria of these grants. The review was to ensure that they adhered to the policies addressing equities across fiscal levels.

The review started in March; the first part of the review would be completed in August 2022, and the bigger parts in August 2023. He noted that National Treasury had the authority to override inequitable allocations made by a department. Mr Pakkies said he did consistently sit in benchmark meetings but, in his experience, municipalities were asked tough questions about their budget allocations and if they addressed inequalities.

Further discussion

Mr G Bosman (DA) asked about the validity of the Learners Unit Record Tracking System (LURTS) data and to what extent this data was compared to data provided by the provincial Central Education Management Information System. He also asked what data was available regarding learner tracking that could inform the review of the education component of the equitable share.

The Chairperson noted that adjustments were made to the education formula but that was not a review. She said special needs education had still not been considered in the PES formula, and there was a difference between adjusting numbers due to an update and adjusting factors taken into account when deciding the formula.

Mr Mackenzie asked for a list of facilities that did not record data and their respective provinces, as this would assist in the allocation of funds. He noted that the facilities should be asked what can be done to resolve this issue.

The Chairperson asked if special needs education would be taken into account in the review. She also noted that the Western Cape had requested that gender-based violence and community safety factors be taken into account in the PES formula. The data discrepancies referred to by Mr Bosman were in the Budget Workshop Presentation. The Committee asked for communication between departments and Stats SA, and she asked if the data was reliable.

The Chairperson noted that they understood the Eskom grant was not for operations infrastructure. She clarified the IPPs she was referring to were not the Renewable Energy Independent Power Producers (REIPP) but rather those procured by municipalities independent of Eskom. She said it was concerning that an infrastructure grant was returned by Eskom as there were non-operational infrastructure issues that needed to be addressed. This included upgrading power stations to accommodate the future of natural liquified gas. The Chairperson suggested that the money be given to provinces so they could work with Eskom in upgrading infrastructure.

Mr Mackenzie requested a list of the water boards that returned funding.

Ms Xaba noted the comment made by the Chairperson on what National Treasury should be considering and said the lists regarding health facilities and water boards would be submitted to the Committee in writing. 

Mr Molukanele said National Treasury did not have access to the Western Cape system of tracking learners. Therefore, Treasury would have to trust that whatever data discrepancies between the national and provincial education departments would be resolved before the national department sends the data to National Treasury to use in the equitable share. He said he would follow up on this.

In terms of a list of health facilities that did not provide utilisations data, he would have to follow up with the National Department of Health to give us the names of those facilities.

On reviewing the education component, he said that the additions suggested by the Western Cape would be taken back to his colleagues. He would follow up on where the situation, including special needs education, and provide formal feedback in this regard.

Mr Pakkies answered the issues surrounding Eskom and the suggestion made by the Chairperson to give the money to provinces. He responded that the issue of powers and functions constrains this suggestion.

He commented that there were inefficiencies in the spending of grants, and solutions were required. The review of the conditional grants would also look at the Eskom grant. It was hard to justify moving money for operations the infrastructure is lacking. He accepted the points made by the Committee but asked for the review process to be given time so that it could pave the way forward.

With IPPs, the REIPP was just one of the solutions and was the preferred solution by metros.
 A unit in Treasury was trying to solve the issues around the legislation and how to assist municipalities in setting up.

Water boards had returned no money - the presentation referred to a proposed provision that allowed National Treasury to recall funds that could not be spent.

The Chairperson read Ms Nkondlo’s comment. She asked for clarification on the relationship between the electricity infrastructure grant and the funding allocated through the DMRE to secure additional energy to the grid through IPPs.  Ms Nkondlo asked which municipalities still had access, given their status declared by Minister to afford them as power generators. 

Mr Mackenzie asked about the conditions for the water board funding – if they were done yet.

Mr Pakkies responded that there were two grants for electricity infrastructure – one directly transferred to municipalities and the other licensed electricity providers. Funding for municipalities that were not licensed was given to Eskom to build the necessary infrastructure to increase capacity.

The additional grid procured through IPPs addressed additional capacity concerns regarding climate change mitigation measures. The DMRE operational budget funded this; it is not considered infrastructure but a means to facilitate the incorporation of private expertise, resources and capacity increases.

The Chairperson asked if she missed the response to the question of the water board funding conditions.

Mr Pakkies stated that the water board funding did not have any conditions, but if the Bill was passed, conditions would be then added to waterboard funding.

The Chairperson said measures on the maintenance of infrastructure should be legislated for Eskom to ensure that infrastructure is looked after.

No members of the public were present and no public submissions were received.

Committee deliberations and Resolutions  

Mr Mackenzie submitted, on behalf of the Democratic Alliance, his views in writing. He read through his written submission. He stated that they resolved to ask for the reasons behind why the old health figures were raised, as this had massive implications if the data submitted was old. His resolution was the usage of the most recent data and noted the issues with the census. Mr Mackenzie appreciated the additional funding provided but stated that the continued increase in the cost of living had massive implications for all budgets and provided a huge challenge for all public services. For these reasons, he could not support the Division of Revenue Bill. This did not negate his appreciation for the additional funding support given to municipalities. 

The Chairperson reiterated the need for clarification regarding the data discrepancies in education between SAMS and the LURTIS. In the Budget Workshop, resolutions were requested but were not received. A conversation was needed between the relevant departments in both national and provincial spheres on how the locust plague should be dealt with.

Mr Brinkhuis submitted the resolution that National Treasury should introduce more oversight mechanisms to address the issue of inequality. He expressed support for the Bill.

The Chairperson said she was unsure about what oversight mechanisms Mr Brinkhuis wanted National Treasury to introduce, as oversight is the role of the Committee.

Mr Brinkhuis responded that he would like to see all spheres of government, National Treasury and the Committee collaborate on introducing oversight mechanisms.

The Chairperson suggested that Mr Brinkhuis rephrase his resolution and request for National Treasury to indicate a different mechanism of oversight over how money is spent within provinces and municipalities when addressing inequality.

Mr Brinkhuis agreed to the rephrasing of his resolution.

Mr Bosman stated that the resolution, as amended, should be asked by National Treasury, as the Constitution and other pieces of legislation were clear on what oversight functions the National Treasury has. He suggested that copies of the relevant legislation be given to the Committee.

She asked if Mr Brinkhuis was happy with the amendment.

Mr Brinkhuis agreed to the amendment.

The Chairperson asked for views on the Bill regarding the negotiating mandate.

Mr Mackenzie was not in support of the Bill.

Mr Bosman seconded his view.

Mr Brinkhuis was in support of the Bill.

The Chairperson was not in support of the Bill due to the reasons presented by Mr Mackenzie.

The Chairperson stated that they would use the document submitted by Mr Mackenzie, remove the references to political parties and add the resolutions put forward by the Committee to create the draft Committee Report on the Western Cape Negotiating Mandate on the Division of Revenue Bill [B6-2022].

The Chairperson read the Negotiating Mandate and asked the Committee if this was a correct reflection.

The Committee agreed that it was the correct reflection.

Committee Report on the Negotiating Mandate on the Division of Revenue Bill [B 6-2022]
The report was considered and adopted.

Committee Minutes dated 25 March 2022
The minutes were considered and adopted.

The meeting was adjourned.