Division of Revenue Bill & Second Adjustments Appropriation (2022/23 Financial Year) Bill: PBO briefing

Standing Committee on Appropriations

08 March 2023
Chairperson: Mr S Buthelezi (ANC)
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Meeting Summary


The Standing Committee on Appropriations held a virtual meeting to be briefed by the Parliamentary Budgetary Office (PBO) on their independent assessment of the 2023 Division of Revenue Bill and the Second Adjustment Appropriation Bill.

The PBO reported that crime in South Africa had seen a worrying increase. Government had also made slow progress in realising education outcomes, resulting in increased illiteracy rates amongst Grade 4 children, and furthering unemployment rates. It expressed dissatisfaction with the rising service delivery challenges that had given rise to protests nationwide.

R164 billion had been allocated in direct transfers to local government, while R8.5 billion was allocated to national departments to spend on behalf of municipalities. The PBO said that local government departments suffered from under-spending, despite interventions available to address this issue.

The Committee expressed concerns regarding unfunded municipal budgets, the inability of local governments to generate their own revenue, the inaccessibility of service delivery in poor communities, decreases in health grant budgets and the impact on National Health Insurance (NHI), and the effect of high medical-legal claims in provinces. 

Meeting report

The Chairperson welcomed the Standing Committee on Appropriations to a meeting with the Parliamentary Budgetary Office (PBO) on their independent assessment of the 2023 Division of Revenue Bill (DoRA) and Second Adjustment Appropriation Bill.

2023 Division of Revenue Bill Presentation

Situational analysis

Ms Sbusisiwe Sibeko, Financial Analyst, PBO, indicated a regression from 2019 to 2021 in houses with limited access to food, which was in contrast to the national development goals.

The number of COVID-19 Social Relief of Distress (SRD) grant recipients was significantly low. The Department of Social Development (DSD) noted that 10.9 million people needed the grant, but it had not dispersed the grant to more than 7.5 million people. The PBO had noted DSD underspending, as R9 billion of the R40 billion in expenditure had been unspent in 2022/23.

The PBO noted an increase in crime by 9.55% year-on-year, with contact crimes increasing significantly. It acknowledged that 5 000 police trainees would be added in the coming years. However, there was no indication of a strategic plan against gender-based violence (GBV) or how the budget would be implemented.

On provincial education, there was an increase in poorer children staying at home instead of attending Grade R and preschool. The PBO also noted that of the 7.8 million unemployed, 40.1% had lower education levels than Matric.

In the healthcare sector, there had been a regression in infant mortality rates, under-five mortality rates, and the burden of malnutrition continued. This was attributed to underfunding and overstretched staff, despite vacancies being open.

Mr Sibeko said local governments were unable to provide services adequately at sufficient levels. This resulted in 193 service delivery protests in 2022, which was expected to increase due to frustrations surrounding load-shedding.

Local governments were unable to address service delivery challenges due to financial and operational challenges. The PBO was concerned over their ability to access data on household burdens related to service delivery. This was due to the suspension of the detailed general household survey due to budget cuts.

It was noted that 123 municipalities had passed unfunded budgets, despite the growing number of municipalities in distress.

The PBO reported that social wages were declining in real per capita terms. While 51% of the budget was allocated to social wages, there had been significant under-spending in this aspect. It highlighted the huge increases in municipal taxes, although wages had not risen in proportion to these increases.

It attributed non-payment for services to poverty, rather than an unwillingness to pay. Due to the local government business model, municipalities have been forced to increase utility rates as a result.

Division of Revenue

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, said that the rise in expenditure costs had more than doubled since the 2008 global financial crisis.

Sectors such as education, cooperative governance and transport had received increased appropriated funds from the revenue fund. However, the healthcare sector had seen a decrease by R2 billion.

On the provincial equitable share, the total average annual medium term expenditure framework (MTEF) increase was 2.5%, with the largest annual increase going to Limpopo. There was also a slight decrease in transfers to provinces from the equitable share allocation.

R164 billion had been allocated in transfers to local government for 2023/24. A further R8.5 billion was allocated to be spent by national departments on behalf of municipalities. 68.3% would be transferred to municipalities as unconditional funds, while 31.7% would be transferred through conditional grants.

Spending trends

Dr Orlandi said that the information provided in the DoRA schedules was not relevant to use for assessment. This was due to a two-year time lag in performance data. The PBO used annual performance reports from national departments to acquire information.

The incomplete performance information on conditional grants made it difficult for the PBO to determine the effectiveness of expenditure and the impact of the output of provincial departments.

Mr Siphethelo Simelane, Finance Analyst, PBO, said that the 2022 local government finance report indicated the number of municipalities in financial distress had increased to 169. This was attributed to poor financial management and the inability to sufficiently raise their own revenue. This had a negative knock-on effect on service delivery.

The PBO noted growing grant dependence, inadequate maintenance expenditure, and outstanding consumer debt as key challenges for municipal budgets.

Under-spending analysis

The PBO reported R15 billion in under-spending from the national government, and predicted increased under-spending in the current financial year.

(See presentation for reasons for underspending).

The underspending raised questions about budget adequacy, the quality of the expenditure, and performance outcomes. The PBO would continue to look at each vote, analysing historical expenditure to identify particular departments and their reasons for under-spending.

Dr Orlandi said R24 billion was approved for infrastructure projects through the Budget Facility for Infrastructure (BFI) process over the 2023 MTEF.

In the 2022 Second Adjustment Appropriation Bill, there were revisions to non-interest expenditure, including the Public Service Wage Bill, South African Airways (SAA), the South African Post Office (SAPO) and the Land Bank.

Mr O Mathafa (ANC) referred to the disinvestment of the district health programme grant, and asked whether the PBO knew the reason for the reduction. He mentioned this in light of the insufficient number of nurses and the large number of vacancies.

Considering the increasing number of municipalities in distress, he asked whether the PBO thought the funding model needed review, and what they recommended as an alternate funding model. This was based on previous concerns from Members that the funding model was problematic, as it relied on municipalities to raise rates and taxes as a sole revenue source.

Regarding the efficiency and effectiveness of conditional grant expenditure, he asked what the PBO recommended as a prudent reporting model, instead of the current two-year reporting schedule.

He agreed with its analysis of reasons for under-spending, and suggested that it was related to departments and municipalities failing to pay suppliers within the required 30 days. He questioned why there were outstanding payments when the finance departments were fully capacitated.

He raised the report that National Treasury (NT) had shared of interventions undertaken with the Department of Cooperative Governance and Traditional Affairs (CoGTA) in an attempt to capacitate municipalities. He acknowledged that they had reported a slow upwards trajectory regarding the challenges concerned.

He asked the PBO whether the DoRA budget allocated resources for external interventions to improve the capacity in municipalities.

Mr X Qayiso (ANC) said that the DSD criteria for grants had an impact on a large number of populations grappling with poverty and unemployment. He took issue with some criteria which hampered the possibility of reaching out to more SRD grant beneficiaries. It was important to engage with the DSD regarding some beneficiaries’ exclusion from access to the grant on account of the criteria.

He acknowledged the increase in the policing budget in the Second Adjustment Appropriation Bill, and insisted that gender-based violence issues must be prioritised. He asked that the Department provide a strategic plan to address these issues. Many interventions had been made through policy statements regarding GBV which could not be ignored.

On primary healthcare, he expressed concern regarding the mortality rate. This was a key indicator of a downturn in economic performance. The PBO had previously raised this as a concern. This was worrying, given the decrease in health funding. He referred to the 51% spending performance for the district health grant, and asked the PBO if this was the reason the grant had been decreased by about R2 billion. He said that the district health grant was vital for advancing the overall national health insurance (NHI) system, and could not afford to collapse.

On StatsSA, he reminded Members of the PBO’s previous reports about under-funded statisticians in sourcing correct data. This made proper planning difficult, with StatsSA failing to obtain the relevant information in advance. He asked the PBO what the reason was for suspending StatsSA’s budget.

He asked for clarity regarding the National Treasury (NT) stating 61% of the budget was allocated to social wages, while the PBO had stated it was far less.

He raised concerns regarding information flow within the PBO's departments.

Ms N Ntlangwini (EFF) attributed the high patient-to-nurse ratio as the reason for the protests in healthcare facilities. She said that the healthcare system in the country was collapsing for the poor. In many poor communities, people returned from the hospital sicker or with another disease. She felt that the State must pay close attention to this matter, and asked the PBO whether the distressed departments would be receiving the findings to address these challenges.

She said that before load-shedding, poor communities were cooking on wood fires as they could not afford gas. This exemplified the high electricity costs. She asked whether the PBO had conducted research on child-headed or women-headed households' electricity affordability.

Mr Mathafa wanted to know whether the PBO had conducted an analysis on the impact of load-shedding on municipal and provincial revenue.

Mr Qayiso expressed concern regarding the recurring issue of vacancies. The Committee had to write to the Department regarding the 10 081 vacancies, as it required assistance to fill these vacancies.

Mr A Sarupen (DA) acknowledged the issues of financial mismanagement and lack of capacity in municipalities. However, he felt that the entire funding model was broken, as it was based on the reselling of services and property.

Municipalities struggled to generate revenue due to the impact of up to 12 hours of loadshedding daily. He felt that the detailed analysis of the impact of load-shedding should also include other factors. This included costs of ensuring generators for information technology (IT), water treatment facilities, and for wastewater facilities to resume operation.

He felt it was a disservice for local governments to receive all the blame without considering these factors.

On the unrecoverable debt in municipalities, he asked whether the PBO had considered the impact of COVID and inflation.

The Chairperson agreed that load-shedding had a direct impact on municipal revenue. The direct impact was the decrease in electricity re-sales, and the indirect impact affected businesses closing.

He asked PBO whether they were aware of the scale of the impact caused by medical-legal claims on the budget for provincial health departments. What was the current status of this, and what was the ability of provincial governments to pay these claims?

He expressed concern regarding the increase in financially distressed municipalities, which had increased from 86 to 175 in the past five years. He asked the PBO how the Division of Revenue Bill had responded to service delivery challenges and financial shortfalls in these municipalities.

The Chairperson acknowledged instances of affluent households, government, big businesses and institutions failing to pay for their services. He asked what measures were in place to ensure municipalities received money from those who could pay.

On conditional health grants, he asked what the impact would be on the NHI. When would the independent assessment of the NHI be made available?

What would happen to the 123 municipalities that had passed unfunded budgets?

What were the implications on the sustainability of the fiscus due to the increase in social wages?

He asked the PBO about the capacity of municipalities to attract and maintain investments in their localities, and questioned their capacity to generate their own electricity.

Referring to efficient service delivery, he asked the PBO for a critical analysis of conditional grants and the equitable share in the government. He questioned why local government used funds from the equitable share, despite the negative impact on service delivery, and whether this method was still relevant.

On under-spending on local government resources, what interventions needed to be made at that level?

Concerning the Second Adjustment Appropriation Bill, he noted that SAA was being recapitalised by its strategic partner. He asked the PBO what they hoped to achieve by putting the entity under a new administration.

PBO's response

Dr Dumisani Jantjies, Director, PBO, said there had been a decline in spending on core areas. He clarified that some government spending went beyond fiscal concerns, and had a greater impact on inequality and economic growth over time.

Since the 2012 fiscal consolidation, the macroeconomic effect has been increased unemployment, disinvestment in the economy, and a decline in economic indicators. Decreasing government expenditure would further hamper economic growth.

He emphasised that government spending was seen as a socioeconomic investment. He used the example of children accessing early childhood development (ECD) to improve the quality of education over time. He said that investments had to be made to see progress in economic indicators.

The PBO agreed that the local government funding model must be re-evaluated, especially in post-COVID circumstances. There was a need to review indigent policies and the capacity of local governments to fulfil this responsibility.

Leadership in municipalities was a key issue. The PBO stated that to ensure the capacity of municipal leaders, there must be effective oversight by CoGTA and the National Council of Provinces (NCOP).

The PBO suggested that there must be a joint meeting to address the concerns regarding the DSD. He emphasised the importance of grants, such as the SRD grant, making notable impacts on low-income households.

On police, he said that this raised issues of budget, alignment and the need for clear risk strategies. The PBO supported a joint meeting with the Department of Justice and Constitutional Development to get clarity on these issues.

The PBO felt there should be a review of conditional grants to see how they could be better targeted to beneficiaries in order to result in effective change.

The decrease in health allocations had resulted from there previously being elevated health funds to assist with COVID vaccinations.

Regarding the reporting of conditional grants, Dr Orlandi said there was a sophisticated system in place for national and provincial departments regarding the Public Finance Management Act (PFMA). The quarterly reports were made available on provincial websites and the Department of Planning, Monitoring and Evaluation (DPME) website. When the DPME took over the planning processes of national departments from National Treasury (NT), conditional grants were excluded from this reporting. National departments still reported to NT on conditional grants.

The PBO said that the NT system was extremely comprehensive and complicated. It suggested that provincial reporting systems should include publishing annual performance plans (APPs) on the website, the DPME database or NT’s website.

Referring to the medical-legal claims, Dr Orlandi said that this would require visiting the provincial departments of health to investigate the claims. She acknowledged that there had been several interventions, but was unsure whether the interventions had reduced the claims.

The PBO was unsure of the progress with the NHI. Dr Orlandi felt that the funds allocated to improving healthcare infrastructure or increasing the staff, needed to contribute towards improving the national healthcare system.

Unfunded budgets remained a big concern. Research indicated that most municipalities that approved unfunded budgets did not have municipal managers or a chief financial officer (CFO). The PBO emphasised the role of councils in approving illegal, unfunded budgets.

Dr Orlandi said the NT had recommended that the SA Post Office (SAPO) be put under administration, rather than South African Airways (SAA).

Concerning the equitable shares, the PBO differentiated that local government equitable shares went towards funding services for indigent policies, while the equitable shares for provincial government were allocated towards education, health and employee compensation.

Ms Sibeko referred to the detailed general health survey, and reminded Members that the StatsSA council had threatened to resign in 2020 due to the significant budget cuts. The survey had been suspended on account of the budget cuts.

The PBO explained that there had been under-spending on programmes where money had been reallocated to medical-legal claims, such as in the Eastern Cape. Using the NHI as an example, it said that the allocation funding model did not afford programmes the room to learn from their mistakes if they did not spend money fast enough.

Despite under-spending, some programmes, especially new ones, required time to be implemented effectively. The PBO encouraged departments to consider the quality of the money spent on their programmes.

The NT noted in their document that their approach had a significant disadvantage for achieving spending efficiency in a fiscally constrained environment. Some programs had become inefficient due to large reductions. The PBO had asked the NT what spending reviews were being undertaken. Using the district health grant as an example, it questioned the implications of budget cuts and how the capacity of performance in programmes had been eroded.

Regarding electricity, the PBO said that at a micro-level many households were in poverty. At a meso-level, it examined the ability of municipalities to raise revenue and their effectiveness, while on a macro-level, it was important to analyse Eskom and the national fiscus.

These challenges required an integrated analysis and approach at all levels. The PBO did not have any available data specifically indicating whether affluent households had been paying these rates.

Mr Simelane agreed that the local government business model was not working, as local government relied on generating revenue to provide services. However, households could not afford to pay for these services.

The PBO explained that many households had to decide between buying food and paying for these services. This forced local governments to raise tariffs to generate more revenue, which further exacerbated service affordability for households.

The PBO had noted a slight increase in operating revenue as a share of the local government total revenue. It attributed this to a slight improvement in revenue collection. However, it felt local governments could do more to address these systematic issues.

The reasons for municipalities being in financial distress included not having a municipal financial manager or CFO. This raised concerns about instability and the capability of leadership within municipalities. The local government Sector Education and Training Authority (SETA) study found that municipal councillors were not appropriately skilled in managing council affairs, and struggled to complete their reports.

Unfunded budgets have increased over the past five years and have contributed to municipalities’ inability to provide services. Municipalities with unfunded budgets often fail to contain their expenditure within the expected income level.

The PBO hoped that NT’s municipal service delivery and capacity building grants would improve the capacity of local governments.

Dr Seeraj Mohammed, Deputy Director: Economics, PBO, referred to social wages, and said there were backlogs predating democracy. Budgets did not reflect the grander vision of social changes and government's improving infrastructure, as had been hoped.

He reminded Members that social wages affected the entire country, not just poor households. The beneficiaries of social wages were predominantly people who could not afford medical aid, and pension funds and could not send their children to private schools.

Using the nurse-to-patient ratio as an example, he said that people with private medical aid had greater accessibility to this than those in poorer communities. For private businesses to survive, they were built on platforms of infrastructure, governance, and various administrative systems provided by government as part of the social wage. While these businesses benefited from this, they often did not pay the true costs or taxes. This was because of many externalities linked to social wages that leak away from each person having a fair share, especially poor individuals.

The PBO felt that social wages needed to be re-evaluated other than in accounting terms.

Dr Mohammed said that for the government to support growth in the economy, they needed to spend and build resilience for poor households. The budgets were insufficient as the vision functioned only from a short-term perspective, with the aim of reducing debt. The focus should rather be on the socioeconomic outcomes needed to decrease unemployment, poverty and inequality in the future. He emphasised the need for economic growth to attract investment over several periods of the METF to address these systematic challenges.

He assured Members that the PBO would further research the unanswered questions on load-shedding, local government revenue and conditional grants. 

Mr Z Mlenzana (ANC) said the current system of wage negotiations had a negative impact on morale. He asked whether it should continue, especially when it resulted in picketing.

Dr Jantjies said that the bargaining system had to be made to work because it was important to ensure progress and avoid destruction, which inevitably impacted low-income households. The PBO would look into the matter.

The Chairperson commented on budget expenditure, and said that quality and sufficient spending were not mutually exclusive terms. He felt that further work must be done to ensure municipalities were attractive to investors. Successful municipalities should be observed to understand how they attracted investments and generated their own revenues.

Dr Jantjies said that a lack of investment had largely affected the construction sector. The PBO suggested that local government could gain investments by investing in socioeconomic infrastructure.

Ms Sibeko said that when departments were unable to fully implement their plans, the government must respond accordingly to ensure that the funds were spent effectively. This required analysing the incentive system itself when under-spending on allocated funds.

The PBO felt that under-spending was low due to the scarce resources available in departments, requiring them to spend the majority of the budget. She also felt that the government could not always expect 100% of spending from departments.  

The Chairperson thanked the PBO for their participation.

The meeting was adjourned.


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