Division of Revenue Bill: National Treasury briefing

Budget (WCPP)

19 April 2023
Chairperson: Ms D Baartman (DA)
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Meeting Summary


The Budget Committee of the Western Cape Provincial Parliament met to be briefed and discuss the 2023 Division of Revenue Bill. The Committee heard provincial equitable share grows at an average annual growth rate of 2.5 percent, whilst conditional grants at 4.3 percent. Updates to the Provincial Equitable Share (PES) for 2023 MTEF include an addition of R31.1 billion to the carry-through costs of the 2022/23 wage implementation and an addition to the Integrated National Electrification Programme Grant. This grant will begin to fund alternative energy technologies in 2023/24.

Members raised concerns that the Western Cape is being punished for good governance by receiving a reduced budget allocation. The Chairperson asked how National Treasury will incorporate criteria in the provincial equitable share formula in a way that rewards good governance. The better a province performs financially and the more people the province assists, the less money the province will receive in the future.

There was also a concern about the loadshedding crisis. Members repeatedly asked what was being done to end load shedding, as the Western Cape is using its own funds to reduce the impact of the crisis. Members also had a problem with the data of residents who receive in-house healthcare not being used. This inevitably means that they are not catered for in the equitable share. This is also the case with special needs learners.

National Treasury disagreed with the view that the Western Cape was being punished for good governance. The decline in allocation is not a result of a budget cut, but as a result of an update of the equitable share formula.


Meeting report

Division of Revenue Bill briefing by National Treasury

Dr Letsepa Pakkies, Director: Local Government Fiscal Framework; Mr Mandla Gilimani, Director: Budget Analysis; and Ms Yolanda Maphumulo, gave the presentation.

Substantive changes to the Bill include, among others:

Section 5: Equitable division of local government share among municipalities 
Subsection (3) is amended to allow for the amendment of LGES payment dates if the transfer of funds is stopped in terms of section 216(2) of the Constitution.

Section 7: Conditional allocations to provinces
In line with the change made in the 2022 Division of Revenue Amendment Act, clauses are added to section 7 in the Bill to allow for the pledging of provincial grants.

Section 13: Duties of receiving officer in respect of infrastructure conditional allocations to provinces
Subsection (1)(g) is amended to include the transferring officer and relevant provincial treasury on the submission of final reports on infrastructure programmes partially or fully funded from the relevant grants.

Provincial equitable share grows at an average annual growth rate of 2.5 percent, whilst conditional grants at 4.3 percent.

Updates made to the Provincial Equitable Share (PES) formula for 2023 MTEF include:
Technical updates to all components with the most recent data if possible
Continuation of phasing-in changes to health components resulting from PES review
R20 billion is added for CoE pressures within the education sector
R23.5 billion is added to health
R31.1 billion is added for the carry-through costs of the 2022/23 wage implementation

There were also changes to local government allocation, such as the Integrated National Electrification Programme Grant. From 2023/24, this grant will begin to fund alternative energy technologies such as rooftop solar power and other energy-saving devices/technologies.

See the presentation for more information.


Ms C Murray (DA) asked what the contributing factors are for increasing debt service costs. What can National Treasury do to bring down the cost?

Ms N Nkondlo (ANC) asked if urbanised poverty was considered when revising the allocation formula. She mentioned that the Western Cape, and particularly the City of Cape Town, has had a high number of people immigrating to the city in recent times. When one looks closely at the social class of the emigrants, they have access to education and healthcare. Has this started to affect the allocation formula?

Was National Treasury able to provide guidelines on the process where provinces could pledge provincial grants? What were the conditions for said grant? And who became the final arbiter? Was there an allocation, and how did National Treasury mediate the situation where certain municipalities were not spending their grants and needed to discontinue those funds?

Mr D America (DA) asked how National Treasury would respond to the wage offer, which is way above the anticipated 3%. Will they make additional allocations now that government has forced this added financial burden upon them?

The Chairperson referred to page 32 of the Bill. She was concerned that whenever the Committee receives the Division of Revenue Bill, it is a prediction of what will happen in the future. It always seems to change, regardless of what was predicted. The Western Cape is the fifth biggest in terms of equitable share in the country. In the 2022/2023 year, they lost R368 000. In the 2024/2025 year, they are losing R651 000. In the 2025/2026 year, they are predicted to lose R899 000. The total revision of adjustment to the baseline for the Western Cape government is now R1 918 000. This is not reflected in the Bill due to the way it is written.

Seeing as most of the money will impact the Health Department, how will National Treasury incorporate criteria in the provincial equitable share formula in a way that will reward good governance? The better the province does, the more people the province assists, and the less money that province will receive in future.

There are several grant decreases for education, and now there is a -4.55% change from the revised estimate provided in 2022/2023. Other provinces, such as the Eastern Cape, are receiving more funds which they are not spending. The Western Cape is receiving less funds which it is definitely spending. She accused National Treasury of punishing the Western Cape for doing their jobs. How will National Treasury revise this in future?

Out of the 112 156 new first-time learner enrollments from outside the province, 88 465 learners are originally from the Eastern Cape. The province should be rewarded for good governance. What is National Treasury going to do to resolve this issue in future, where many learners are immigrating to the Western Cape and are not being financially catered for in the grants from National Treasury?

National Treasury response

Mr Gilimani said that when tabling the budget, the Minister of Finance made it clear that any unfunded wage settlement would result in trade-offs. National Treasury is trying to find measures which can be implemented. For now, it would be premature for National Treasury to confirm that it will provide additional funding and to what extent for all the provinces. They are currently reviewing the matter.

He did not agree with the Chairperson accusing National Treasury of punishing the Western Cape for doing their jobs. The decline that is seen in the Bill is not a result of a budget cut, but as a result of an update of the equitable share formula. They had a meeting with the Department of Basic Education concerning learner numbers. The updated number of learners in the equitable share shows a decline in number of learners in the province; hence the decline in the education component. However, it is noted on the ground that the learner numbers are increasing in the province. He reminded the members that health and education take up a large portion of the equitable share formula. It has been noted that within the Western Cape, there has been a decline in the usage of facilities such as hospitals and clinics. The formula takes into consideration the utilisation of such facilities.

Ms Olorato Tlhoaele, Senior Economist: Intergovernmental Policy & Planning, NT, said that it has proven difficult to incorporate urbanised poverty into the equitable share. Changes made to the health component are changes which are progressive in addressing some of the challenges. When the risk adjusted index was designed, for example, it considered the measure of sparsity. The index is useful as it considers the population without medical aid or living too far to access health facilities, which applies to all provinces. They have considered the burden of disease in the Western Cape. They have discussed measures to put in place to differentiate learners and place them in different categories.

They will provide a document which lists the guidelines out in full. She mentioned that the provinces must meet certain conditions for conditional grants. The Inter-governmental Fiscal Relations Act is applicable here. She confirmed that the respective provincial treasuries had been consulted on borrowing on behalf of other provinces.

She compared the previous year’s budget to the current year’s budget and found an increase in allocation to the Western Cape. National Treasury is happy to provide the Committee with more details on this. Before allocation is done, there is a rigorous assessment process for performance in the grant. The Bill does not always reflect the changes in the equitable share as a budget cut. This is because the changes would only reflect the update which took place with the data that informs the equitable share. Incorporating changes made to the review of the health component is an example of a measure they have taken. They have been phasing in the changes over a period of three years.

Ms Maphumulo responded to the questions about the process of allocation discontinuation. There are documents submitted to each Department at the start of the year to inform them of what should be allocated to each municipality and the projects which will be covered. The business plan submitted to National Treasury is also used to identify projects which will be funded from a specific grant. This plan would inform the payment schedule on how money will flow to the municipalities. Municipalities are assessed every quarter, after which National Treasury writes to the municipalities to inform them of what funds will be discontinued. National Treasury would then go through all the responses from municipalities to make a judgement call on discontinuation of funds. When funds are discontinued, it does not mean that projects should also discontinue. It just means that the funds will be reallocated elsewhere to other municipalities. Any funds which are not spent are redirected to the Revenue Fund.  

Further questions from Members

Ms Nkondlo noted that the majority of the population is migrating from rural areas into urban areas. Along with the socioeconomic realities that come with this, perhaps a conversation is due with National Treasury and the City of Cape Town about the municipalities that are now burdened.

The Eastern Cape’s unspent funds have been redirected to the Western Cape and Gauteng. In so doing, is National Treasury resolving the issue of education infrastructure in the Eastern Cape? She was very concerned about this, especially with the high number of children dying in pit toilets. She suggested that they have a separate conversation in this regard.

The Chairperson referred to the respective figures and baselines. She explained the process of formulating the budget as the Committee. The Committee look at the previous year’s figures, as well as the current year’s figures, and calculate a percentage from there.

Because healthcare is being provided to residents within their homes, this is not considered as people using healthcare facilities such as hospitals and clinics. Therefore, this will not form part of the data, meaning the province will suffer budget cuts. Is this truly the case?

Part of the provincial equitable share formula includes the education component, which makes up 48% of the share. She asked if they had the lurits data for the education component. She asked for clarity on this since she was confused.

National Treasury response

Mr Bongani Dlamini, Acting Director: Financial Management, NT, clarified that the Division of Revenue is informed through the Inter-governmental Relations Act. Section 10 of the Act states that the Minister should introduce the Division of Revenue Bill for the financial year to which the Bill relates. This is why the Bill reflects the current year and the indicative for future years. The indicative allocations are subject to change when viewing the budget of their respective years.

The provincial departments are indeed collecting the data. Every year from 30 June, the provinces are to submit this to the National Department of Basic Education. In the case of the Western Cape, the date was chosen for approximately March. It was indicated that this date was chosen prior to the learners’ arrival at school, which is why the figures appear to be low in the Bill. In future, the date should be selected according to the province’s preference. He informed Members that the Head of the Department of Basic Education signed off the figures.

Ms Tlhoaele further added that National Treasury is using the lurits data with the equitable share to make updates to the formula. She said the data offers an opportunity to review how they can improve the component. She acknowledged that the revised estimate, which the Chairperson provided earlier, is different and could have resulted from changes within the financial year.

Mr Gilimani clarified that the province is not losing money due to the residents receiving healthcare within their own homes. Rather, the data which was used did not take into consideration the in-home care. There is an ongoing discussion with the Health Department on how to bring forward this data.

Further discussion

The Chairperson was not reassured and disputed the statements that Mr Gilimani made. If the Western Cape Department of Health were to assist every single patient at their own homes, what would be the number of people being assisted when it is put into the equitable share formula? Would it be zero? Or would it be the current figure that it is?

Mr Gilimani said that the figure would definitely increase. The data source used in all nine provinces would be different from that of the Western Cape.

The Chairperson expressed disappointment that patients who receive in-house healthcare assistance will continue not to be reflected in the data. She then opened the floor for new questions.

Mr G Brinkhuis (Al-Jama-ah) asked if the conditional grants address the inequality faced in the country. The Western Cape is the epicentre of inequality in the country. He was more concerned about the data being collected versus the groundwork, which is the actual reality. These two factors are not aligned with each other.

Ms Nkondlo asked whether all newly-built houses will be fitted with rooftop solar panels from the current budget. Are the reforms to the Integrated National Electrification Programme Grant being introduced because National Treasury is now confident that the municipalities are ready to roll out this project? She wished to understand the state of readiness. She asked about the allocations presented in slide 11. What is the ‘economic’ percentage outlined in this slide? She again brought up her concern about ‘urbanised poverty’ within the municipality.

The Chairperson recalled a time last year when National Treasury prepared a Microsoft Excel spreadsheet on the data, which she found useful. She suggested that for the next session, National Treasury could explain how they consider data and make the allocations for percentages. The Chairperson asked for the documents to be forwarded to the Committee.

The Chairperson expressed concern for the exclusion of data on special needs learners, on gender-based violence and safety components in the equitable share. On slide 11, it explicitly shows that these factors are not included in the equitable share formula at all. This concern has been brought up on numerous occasions. The Western Cape is receiving a 16.66% cut in the conditional grant for learners with intellectual disabilities grant.

How would National Treasury assist with the energy response plans of provinces? How will National Treasury assist provinces with becoming loadshedding free? The Western Cape has already provided R1.1 billion of its own money for said response plan. She stressed that they had given Eskom a large amount of money. She mentioned that had they not given so much of the province’s own money; the province could have worked on a plan to become loadshedding-free.

The Chairperson referred to page 54 of the Bill, under ‘Unallocated provisions to provinces for disaster response’ and ‘Unallocated provisions to municipalities for disaster response’: she said that when you add R145 000 000 to R372 000 000, you get R517 000 000 in unallocated provisions. If this was divided up by the nine provinces, they would each receive R57 000 000. Regarding energy response plans of provinces; how is National Treasury going to assist the Western Cape, particularly, in this regard? This was a grant the municipalities had received for many years; nevertheless, in the current Division of Revenue Budget, how would National Treasury assist the provinces in becoming loadshedding-free? For example, if one were to take the R57 000 000, one could think about what this amount could do to assist. As it stood, the Western Cape has already contributed R1 100 000 000 of its own money to the Response Plan. The province is giving R56 000 000 to alternative energy support for Small, Medium and Micro Enterprises (SMMEs), the suggested R57 000 000 could have been used to pay for the alternative energy support. The emergency loadshedding packs they are allocating will cost the province R60 000 000. The Green Hydrogen Development, to which they are also giving R60 000 000, would have been covered by the suggested amount of R57 000 000.

In another example, in the Eskom annual report, it was known that National Treasury gave Eskom an exemption for its irregular expenditure to the amount of R67 100 000 000 (as of 31 March 2022). If one were to take the R1 100 000 000 and divide it by the irregular expenditure of R67 100 000 000, it gives you 1.64%. If every province received roughly 2% of the irregular expenditure; they could have used that money to eventually become loadshedding-free. In another example, the full allocation for the provincial equitable share allocation is R58 900 000 000 (rounded up). Compared to the irregular expenditure of Eskom, the irregular expenditure could have paid for the whole province’s governmental budget and left them with change of approximately R10 000 000 000, which could have been used to form ten Western Cape energy response plans. She understands that one cannot go back in time and retrieve the irregular expenditure (unless they were to sue those who are responsible), but regarding the current Division of Revenue Budget, how will National Treasury assist provinces in becoming loadshedding-free? Provinces are using their own funds to fulfil national government mandates, and this is unfair to the provinces.

National Treasury response

Mr Dlamini said that South Africa is one of the most unequal societies. The Division of Revenue budget is designed to specifically help the poor. Rather than looking at specific inequalities, he suggested looking at the situation from a holistic perspective. The rich are not likely to use hospitals and clinics because they have access to medical aid, unlike the poor. They require data to inform the respective allocations. The challenge continues to be data.

Regarding the economic component of the equitable share, they measured this using the economic activity within the province. The reason why there was a lack of funding for special needs learners is because of the policy of the National Basic Education, which speaks of inclusivity in education. They could not have separate components when the policy speaks of inclusion. National Treasury would not be able to begin ranking the level of ‘need’ among such learners. He mentioned that this decision was canvassed widely and not made by National Treasury alone. Unallocated funding was specifically for potential disasters in future. Should the funding be depleted, there is reserve funding which gets accessed.

Dr Pakkies assured Members that by the time they began conversations about the grid, there were already plans to amend the framework for about 2000 connections. Upon having discussions with municipalities regarding the state of readiness, several municipalities came forward and claimed that they were ready to receive the provision, so they may begin the rollout. The Department of Energy is currently working with those municipalities and is hopeful about the upcoming results.

Regarding the rooftop solar panels, they have a backlog with the communities. National Treasury is assisting these communities first and hoping to alleviate pressure from the grid. He mentioned that Eskom would play a huge role in assisting said communities. Since their main priority is the poor communities, should any infrastructure be built for the rich, National Treasury requires municipalities to co-fund those projects. National Treasury attempts to build incentives with the grants.

Final questions

Ms Nkondlo asked for clarity on the requests which get submitted regarding the upgrading of informal settlements. What is the reason for the slight increase in the grant? Why has there been an increase in the Regional Bulk Infrastructure grant? What is it that drives National Treasury when making such allocations?

The Chairperson asked what amount of money is allocated in the budget to assist provinces in becoming load shedding free. She stressed the frustration and struggles endured in the Western Cape due to loadshedding. What is the resolution? The province is using its own money to assist with eradicating loadshedding.

She recounted the struggles which ensued after the President called a national state of disaster in February 2020. Why was there no adjustment to the Bill upon hearing the call for a national state of disaster?

National Treasury response

Mr Dlamini said that when the President called for a national state of disaster, the Bill was almost to completion and it was difficult for them to make amendments at the time. Contrary to popular belief, the issue is not always money. Sometimes it is about changing the way things are done. He mentioned that they had the challenge of having to think about where to get the funding from, while bearing in mind not to plunder the country even further into debt. Many assessments had to be made and not all of them had money involved. He assured Members that should the funding have been required at the time, it would have been included in the Bill.

Dr Pakkies agreed that there appeared to be inconsistency with the allocation and the spending of the municipal emergency housing grant. The criteria to allocate this funding was consultative in nature. Although the large increases are part of the main budget process, the agreements were different. The large increases were due to the municipalities’ allocations being augmented for specific purposes only, except for the formula-driven general purpose grants. There were no penalties for said grants. The informal settlement grant is still new in the system, and new grants tend to be very challenging initially. Said grant is currently being poorly spent, but National Treasury is working with municipalities to try and better manage the spending of the grant.

The Chairperson thanked and dismissed National Treasury and asked only the Committee Members to remain so she could close the meeting.

Closing comments

The Chairperson said that their duty as Members of Parliament is to ask the tough questions and address the concerns affecting the poor. She noted the many factors which require funding in the country and acknowledged that the budget is indeed spiralling out of control.

The meeting was adjourned.



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