Division of Revenue Bill: COGTA & SALGA inputs; with Ministry

Meeting report

Minister’s remarks

Ms Thembi Nkadimeng, the Minister of Cooperative Governance and Traditional Affairs, thanked the Committee for the opportunity to comment on the 2023 Division of Revenue Bill, as it is important in adequately funding municipalities that are in financial distress. She said that over the 2023 Medium Term Expenditure Framework (MTEF) period, about 52.1 billion would be transferred directly to local government and that a further 26.6 billion had been allocated for indirect grants. Poor and largely rural municipalities receive the bulk of their revenue from transfers, while they could raise the majority of the remainder of their budgets from their own revenues.

It was critical for Members to note that the Division of Revenue Bill in its current form does not provide special grant funding for municipalities in financial distress. The Bill provides a broader framework through which nationally raised revenue is divided between the three spheres of government. This issue was also raised and confirmed by municipalities during the 2022 Local Government Summit. Discussions that are underway needed to ensure that they enhance and change the status quo, particularly for rural and small municipalities, so that they are able to develop appropriate funding mechanisms for themselves. Where they are unable to do so, national and provincial government needs to be able to assist by developing a comprehensive way for these municipalities to also be supported. If national and provincial government does not do this, this means that the poor are not funded and the lives of those who live in these municipalities are not improved.

CoGTA’s presentation, through the Municipal Infrastructure Support Agent (MISA), would also cover how it would collaborate with municipalities and other sector Departments to assist municipalities in financial distress with infrastructure development. Regarding municipal system improvement grants, the Ministry has determined and outlined key areas to assist municipalities in addressing issues resulting in adverse audit outcomes. This would mainly be done with technical assistance on both improvement of data and records management, which has been highlighted by the Auditor-General repeatedly as issues in the municipalities. The Ministry has been assessing the state of records and its management in each of these municipalities so that it could develop an implementation plan. This plan would assist these municipalities in ensuring that at any given time, when Parliament or any other stakeholder (including community members) requested information and records, they were available easily. This will become a key pillar of ensuring that the national and provincial management systems are put in place.

The Minister also touched on local government equitable share. This occurs in municipalities that are not able to spend their conditional grants because the funds are redirected or used for purposes other than what they are meant for. The Auditor-General has reported that they were used particularly for payment of salaries and running of many of the operations of municipalities. This is an unintended purpose and government needs to ensure that the equitable share is used for what it is meant for.  

Regarding disasters, there are unallocated allocations in the Division of Revenue Bill which would only be released to a classified disaster as a top-up fund when organs are unable to deal with the effects of the disaster and the grant conditions have been met. Due to climate change and constant climate conditions that do not favour people in rural and muddy areas, there are two states of disasters: one for energy and one for the floods that occurred in about six provinces. Through the National Disaster Management Centre (NDMC), provinces and municipalities were assisted in ensuring that they appropriately used their flood support programs to bring back the life of the communities. To this end, municipalities have put up measures to address some of the challenges and their progress would be monitored through their monthly reports.

Briefing by CoGTA

Ms Avril Williamson, Director-General of Cooperative Governance, gave the presentation.

Under the DORA Bill, the following changes will be made:

• R8,3 billion is added to the local government equitable share to increase coverage of the provision of free basic services
• R2.5 billion in 2023/24, R2.3 billion in 2024/25 and R3.3 billion in 2025/26 to fully fund the provision of free basic services
• It will be allocated through a formula to ensure fairness for all 257 municipalities

The annual Division of Revenue Bill does not provide special grant funding for municipalities in financial distress. It provides a framework through which nationally raised revenues are divided between the three spheres. Municipalities in financial distress are supported by government through other support mechanisms, e.g. the Municipal Support Improvement Plans (MSIPs). The decay in municipal administration, governance and high unemployment is one of the contributory factors to the state of financial distress in municipalities.   

To deal with the challenges identified in the State of Local Government Report, the Department has developed a framework to guide the process of developing, implementing and monitoring the MSIPs. In an effort to deal with challenges facing application, implementation and monitoring of municipalities under interventions, NT and COGTA have developed an Interventions Collaborative model. In collaboration with National Treasury, MISA initiated a process of supporting municipalities with Budget Facility Infrastructure funding (BFI). More than 30 municipalities attended a workshop in this regard.

(More details can be found in the presentation attached).

Briefing by SALGA

Opening remarks

Cllr Lesetja Dikgale, Chairperson of the Municipal Finance and Fiscal Policy Working Group, said that the local energy crisis was hitting local government badly. If nothing is done, particularly to ensure that the damage caused by loadshedding is somehow mitigated, local government may find it difficult to deal with its responsibility of service delivery. This is because electricity was part of their revenue-raising mechanism, particularly in big cities and secondary cities. He also indicated that they were happy that an increase occurred. However, they are looking for a way of dealing with the general challenge faced by local government concerning funding.

Cllr Dikgale also thanked Treasury for taking on the Eskom debt. This was an important intervention, especially looking at the negative impact that the debt had on municipal finances. The interest rates charged and the payment structure between Eskom and municipalities were part of this impact. He added that they were working on syncing their processes. They are running a campaign to promote responsible citizenry, which will remind people that there is no way that local government could function without their contribution.

He indicated that they were not 100% happy with the solar incentive. If this incentive worked well, it might remove most of their paying customers. As much as it helped with the issue of loadshedding, it took some of their revenue.

Presentation

Mr James Matsie, specialist in municipal infrastructure finance, SALGA, gave the presentation.

SALGA has made the following conclusions regarding the DORA Bill:

1. SALGA welcomes the 11%, or R14 billion, upward revision of the gross allocation to local government for the 2023/24 financial year. The upward adjustment in the outer years of the MTEF cycle of 6.3% billion and 5.1%, or R4.5 billion, in the 2024/25 and 2025/26 financial years, respectively, is also welcomed.
2. SALGA supports the refinement of the LGES formula in an effort to arrive at a cost-reflective basis for rendering basic municipal services as articulated in the 2022 MTBPS.
3. SALGA acknowledges the government’s takeover of ESKOM debt and is awaiting the Circular for conditions for municipal debt relief.
4. SALGA supports that integrated approach to local government capability development led by National Treasury and supports the update to the municipal borrowing policy framework and the approval of the Municipal Fiscal Powers and Functions Amendment Act
5. That the upward trajectory in local government allocations from nationally raised revenue be maintained to realise the aspirations contained in the 1998 White Paper on Local government regarding subsidising the provision of basic services.
6. The Local Government Summit noted that there is disequilibrium in the allocation of resources versus the allocation of functions. SALGA is working on developing the ideal allocation of nationally raised revenue to local government.

SALGA recommends that:

1. All stakeholders in intergovernmental fiscal relations support the recommendations of the LG Summit: for SALGA to propose an ideal allocation of nationally raised revenue to local government.
2. It be included in the consultations on the Circular dealing with the conditions for debt relief for municipalities
3. It be consulted on the norms and standards to regulate municipal surcharges on electricity. The 2024/25 budget consultation process address the following:

            4.1 Government debt owed to municipalities

            4.2 Fiscal and service delivery pressures on border municipalities

            4.3 Reversal of emergency housing grant to local government

            4.4 Any consolidation of conditional grants to be Schedule 5 grants

(More details can be found in the presentation attached).

Discussion

Mr A Shaik Emam (NFP) asked what measures SALGA would put in place to ensure stability in local government. What measures had CoGTA put in place to stop the high levels of tender rigging, which escalated prices with no value for the consumers? Would CoGTA consider a credible, transparent process of recording all tenders and contracts awarded? He asked both SALGA and CoGTA how they would minimise legal costs spent by local governments fighting each other.

Mr N Kwankwa (UDM) asked how SALGA aims to address the weaknesses in delivery of services at local government level. He also asked if they would consider a lifestyle audit on political office bearers and senior officials to prevent corruption.

Mr X Qayiso (ANC) asked if anything had been done to build self-reliance and to reduce municipalities’ need to rely on financial consulting. This is a very expensive exercise that does not have a return on investment. What measures have been put into place to assist municipalities struggling to generate revenue on their own? This would ensure greater sustainability and financial viability of municipalities. Have municipalities that require critical infrastructure for basic service been identified? What mitigating measures have been put into place to limit the increasing debt from the water authorities and municipalities that do not have water licenses to purchase directly from the Department? How are the Departments working with the provinces to strengthen political oversight? This relates to the irregular funding of budgets which happened in several municipalities. What are the relevant ways to assist municipalities in adopting unfunded budgets? Are there any control measures in place? What is being done to improve the registration process and what is the timeline?

Ms N Ntlangwini (EFF) asked what the plan is to address the registration crisis within indigenous households and the corruption pertaining to this. She also asked what CoGTA and SALGA planned to do to solve unauthorised expenditure within municipalities.

The Chairperson asked CoGTA why the local government equitable share had to be transferred when certain conditions were met, while the national and the provincial equitable shares were transferred without conditions. He also asked SALGA what progress was made regarding electricity generation in municipalities and if they were facing any hurdles. What is the progress of transformation policies in local governments and have there been any challenges? What is SALGA doing to ensure that the accumulation of debt by municipalities does not recur?

SALGA’s response

Cllr Dikgale said that failure of collusion was a problem that SALGA had already identified and had indicated in one of their engagements with local government and the stakeholders. A framework that clearly indicates how collusion should be ranked has been developed. With the help of CoOGTA, they could work together towards ensuring that they give legal credence to the framework. Parliament had undertaken research on how collusion should work in South Africa at the national and provincial levels. He said that the framework would minimise the current challenges related to collusion.

In South Africa, when political parties lose their battle on the ground, they resort to legal battles. It is difficult for SALGA to mitigate against this because each party has its own objective strategies and tactics that it uses. SALGA will continue to engage with all political parties, particularly at local government level, to ensure that they continue with their mandate of saving their people rather than the grandstanding that happens. Lifestyle audits are welcome because they give the kind of credibility that society would want to see in their leaders.

SALGA will continue to engage with municipalities to ensure that, in lieu of unemployment caused by the economic downturn and exacerbated by COVID-19, they use the indigent registers. It is a good way of getting sufficient funding for poor households to get the necessary basic services.

In the case of Unauthorised Irregular, Fruitless and Wasteful expenditure (UIF&W), SALGA has interventions. This includes having the companies that they work with developing strong controls within the controlled environment, particularly around supply chain and the ability to adhere to regulations as indicated by National SALGA, would continue to engage with municipalities to ensure that the UIF&W is not only reduced but are also completely eradicated.

Regarding Eskom debt, the only challenge the local government faces is the payment structure between Eskom and municipalities. The two important aspects that need to be dealt with are when Eskom should be paid and the amount of interest to be paid. Arrangements should be made that the payment should go together with how the municipal revenue processes work. Interest should not be used to punish local government and interest makes it difficult for municipalities to pay. Part of SALGA’s responsibilities is going to municipalities and indicating the importance of offering financing for electricity bills. This is so that in their final analysis, there are no more new and unnecessary debts that would confront them in the future.

Mr Sabelo Gwala, KwaZulu-Natal Director of Operations, said that most municipalities could not afford to build their own power generation infrastructure. However, there is an alternative. Power can be bought from independent producers or embedded generators. These are people who generate power for their own use, who can then send excess power to the grid. Johannesburg and Cape Town are examples of cities that have already issued invitations to sell to the municipalities and help supplement what they buy from ESKOM. There is still a limitation on the smaller municipalities financially. SALGA assisted municipalities in designing correct tariffs for billing purposes. If this is done correctly, they would certainly be able to supplement some of the income that will come from power distribution between the individual users as well.

On the issue of the indigent register, SALGA’s Chief Digital Office met with more than 50 municipalities and looked at the databases and systems in use. They have figured out that most of the systems with databases are so manual in nature that they are not dynamic. SALGA is working with municipalities to help them develop those databases.

CoGTA’s response

Mr Mbulelo Sigaba, Chief Director: Operation Clean Audit, said that the local government does not have conditions on the equitable share. Municipalities abuse conditional grants: they use conditional grants for purposes other than for which they are meant. In terms of the Division of Revenue Bill and the Constitution, National Treasury invokes the Constitution when municipalities do not reflect those amounts in the account, meaning they would have used it for other purposes. In the cases of unfunded budgets, they would normally withhold for a certain period and review their budgets until they balance.

Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, National Treasury, said they had included a provision that strengthened the disclosure of bad practices like litigation between municipalities and abusing taxpayers' money for internal purposes. Instead of following the intergovernmental framework, procedures and processes, people abuse taxpayers’ money. Therefore, they had included additions or provisions in the DORA Bill and the monitoring system would be adjusted accordingly.

On the issue of underfunded budgets or the whole budgeting system, Treasury annually issues two budget circulars to guide municipalities in preparing the budget for the next cycle. The purpose and objective of the process are to dictate whether the budget is funded in terms of Section 18 of the Municipal Finance Management Act. In the space of local government, they do not refer to a balanced budget. They refer to a funded budget. If a council or municipality, which is responsible for ultimately adopting the budget, proceeds with an unfunded budget, then they are in breach of legislation. With the political support of the Budget Council and the Budget Forum, this is where they have introduced measures to establish the discipline. They are making inroads, although very slowly. Municipalities live beyond their means and do not collect the revenue they are legitimately allowed to collect. The amounts they would publish in the second quarter results would illustrate the outstanding debtor’s book, which was quite massive.

Ms Williamson said that on the question regarding transparency, this was also a financial question which should have been in the purview of National Treasury. This question was also raised in their last meeting and they have since provided a written response to the Member. Regarding capacity building, through the Impact Forum, a monitoring approach is being utilised in all training interventions. This is a joint effort by not only CoGTA but also with National Treasury, SALGA and local governments. As the Department of Cooperative Governance, they had looked at a performance assessment tool. The norms and standards around the assessment tool had been developed in consultation with all key stakeholders and role players. Within the assessment tool, there are key indicators that they are looking at that would be able to assist them with early detection going forward. The Department is still at the tail end of endorsing the assessment tool/

Mr Mzilikazi Manyike, Deputy Director-General: Governance and Intergovernmental Relations, said CoGTA is in deliberations with the South African Revenue Services (SARS) regarding a conclusion of the Memorandum of Understanding (MoU). Once municipalities had compiled their indigent registers, they would send them to CoGTA. CoGTA then passes the information to SARS for them to check whether some of those people are people who should not be regarded as indigents, based on a tax point of view.

Mr Ntandazo Vimba, Chief Executive Officer, Municipal Infrastructure Support Agent (MISA), said they had recognised municipalities requiring critical infrastructure refurbishment. A national water and sanitation improvement program had been designed between CoGTA and the Department of Water and Sanitation. The Department of Water and Sanitation had invoked section 63 of the Water and Sanitation Act in some of these municipalities. There was also a program to address surplus in those municipalities. MISA has made some proposals that correct the non-grid electrification so households and schools, particularly those in rural areas, can afford to. There are provisions in the DORA Bill in Sections 18, 19 and 20 for interventions when municipalities fail to spend grants. They had implemented Sections 18 and 19 over the years, which stopped the allocation of grants to municipalities failing to use them. Part of the intervention does not result in improvement in most municipalities. However, it disadvantages particular communities that are meant to benefit from the grant reallocated to other municipalities. Section 20 of the DORA Bill allows national government to intervene in municipalities with underspending problems. The national government intervenes by appointing implementation agencies to support the municipality that is struggling and ensures that the money that was meant for communities is indeed spent in the spaces where it was allocated.

Minister Nkadimeng added that SALGA had taken ten municipalities on their Municipal Audit Support (MAS) program, where they identify and assist municipalities with their audit plans. Although this may not be a sufficient response, it showed that it was a start.

Minister Nkadimeng said that municipalities are required by law to advertise the price of contracts and they had verified that they do this. The Municipal Finance Management Act (MFMA) compels them quarterly to put their council documents, which are public documents, in public access meetings. CoGTA can try to collect that information and distribute it. National Treasury could also inform the public on who has been contracted, for what, for how much, for how long and how much it will ultimately cost. They should also verify whether costs are escalating or are not escalating. She was not certain whether SALGA would have the capacity to look into all supply chain processes that are done by municipalities.

Part of CoGTA’s discussion with SARS is to ensure that SARS verifies with municipalities if SARS owes the municipality money. SARS pays the municipality first before the indigent. This relates to how municipalities can avoid debt accumulation. In many instances, the state pays back the same person who owes the state, and SARS is one of the starting points.

The Minister added that they were looking into the assessment tool to improve economic development and growth of municipalities. They are also looking into ways to promote development and minimise unemployment in the spaces they operate as municipalities. COGTA has a presence in provinces and staff go to these municipalities on a day-to-day basis to assist them with legal matters/

The Chairperson noted that there were things that needed legislation intervention and things that had to be done to allow for intervention. Moving resources from one municipality because there is no capacity, to another one was punishing people who had nothing to do with what capacity government has.

Government needs to come up with long-lasting solutions. He requested that the Minister reduces reliance on consultants. Getting consultants to do the books at the end of the year did not help. He asked the Department to provide documentation detailing the interventions so they could check on the progress.

The meeting was adjourned.