FFC 2024/25 Division of Revenue Submissions

Meeting report

The Chairperson welcomed everyone to the meeting, informing them that they would deal with the 2024/2025 financial and fiscal division of revenue and one set of minutes. She noted Ms C Murray’s (DA) apology for needing to leave early, the presence of Mr C Fry (DA) as alternate, and an apology from the chairperson of the FFC, Dr Patience Mbava.

FFC submission on 2024/25 Division of Revenue

Mr Michael Sachs, Deputy Chairperson, FFC, thanked the Committee for the opportunity to meet with them to present the FFC’s annual presentation of divisional revenue for next year. He noted that next year would be the FFC’s 30th anniversary. The theme for the 2024/2025 financial submission was improving service delivery and inclusivity in an environment of expenditure moderation, essentially explaining how to do more with less. The economy was currently faced with global and domestic challenges that heavily impacted public finances. The outline of the submission consisted of two parts, the first dealing with macro submissions.

Post-COVID-19, Mr Sachs explained that the country had entered into a temporary recession that could be quite dangerous because of the rise in inflation, its impact on budget deficit and the gross debt to GDP. He pointed out that the increasing red line in the graph was not to be mistaken as a good thing - in fact, the higher the line goes, the higher the budget deficit becomes. Unemployment was persisting, no longer being a cyclical issue but it had now become an inter-generational problem. This has negatively affected the employment and income potential of the younger generation.

He said the Western Cape remained the province with the lowest unemployment rate, but there was a need for an inclusive approach to growth, employment and economic development. The Western Cape was on the higher end of growth compared to the other eight provinces, with the strength for potential growth lying in finance, trade and manufacturing. Construction, community services and tourism could also further potentially increase this growth.

Impact of inflation

Ms Sasha Peters, Programme Manager: National Appropriations, FFC, said that the first chapter of the submission focused on inflation. The global economy has experienced a dramatic drop in inflation in the last four to five decades, particularly during COVID-19 and the lockdown period. Since then, a combination of resurgent commodity prices, supply chain interruptions, labour deficiencies and an upturn of domestic demand have all prompted inflation to reach unprecedented levels. This resulted in a tightening of global financial divisions.

She presented the findings on how inflation impacted equality and poverty, essentially putting the poor and vulnerable in a worsened position. She pointed out that inflation affected different households differently, worsening inequality because many impoverished households maintained their assets in cash. Inflation eroded the value of their savings. In emerging economies such as South Africa, most poor households were net food buyers and when there was a sharp increase in food prices, the effect was much harsher on these households.

FFC’s analysis of the interplay between inflation and public debt dynamics suggested that an inflation shock would increase the debt ratio after only a few quarters. If the inflation shock was unanticipated, it would have a bigger impact on the debt ratio. The effect of public increases in debt on economic growth has received renewed attention, especially in the context of the pandemic, because there has been a widespread increase in deficits and debt across the globe. The findings showed that when debt increased, the result was a decrease in output and gross domestic product (GDP). In countries where there was a rising debt trajectory, an increase in the public debt-to-GDP ratio harmed the real GDP. Having a primary surplus where revenue exceeded expenditure had a growth-enhancing effect.

FFC's recommendations

It had two recommendations based on their research in this chapter. The Commission recommended that Treasury continue to focus on consolidating efforts on revenue and expenditure that were appropriate for debt reduction. It suggested achieving this by targeting a primary surplus to reduce debt, foster growth and restore fiscal sustainability.

The Commission also recommended that National Treasury and the Department of Social Development (DSD) design a comprehensive social security programme to protect the population that was exposed to the negative impact of rising inflation.

Impact of state-owned enterprises and basic income grant on fiscal sustainability

Chapter two dealt with state-owned enterprises (SOEs) and the basic income grant (BIG), and their impact on fiscal sustainability.

Ms Peters pointed out that very large and important SOEs posed a significant fiscal risk to government because they required fiscal transfers to cover losses. She also noted that there had been many proposals for implementing the BIG as a permanent social assistance programme for those aged between 18 and 59 who were unemployed.

The objective of the second chapter was to assess the state of the major SOEs, their role in economic development and their impact on fiscal sustainability. The FFC also evaluated the cost of implementing the BIG programme and South Africa’s capacity to absorb the costs associated with such a programme. Since 2010/2011, R162 billion has been allocated to bail out financially distressed SOEs, and Eskom has received just over 80% of that amount (R130 billion) to date. The new electricity ministry would create unnecessary competition for resources, jurisdiction and decision-making powers, which in the end, could serve to create a delay in the existing crisis that was currently being faced with the energy crisis.

Given the dominance of Eskom in the government’s bailouts, Ms Peters pointed out the financial and operational performance between 2017 and 2022, noting that Eskom’s liabilities had increased from R534 billion in 2017, to R637 billion in 2022. Alongside this, its net loss had increased from R2.3 billion in 2018, to R20.9 billion in 2019. This number decreased in 2020/21 to R18 billion.

Eskom had shown a significant decrease in its electricity availability factor (EAF), which measures the actual energy output of an electricity-generating device concerning the electricity it would produce if it operated at its regular performance. In 2012, Eskom’s EAF operated at 82% but this number decreased to 64.2% in 2021, dropping further in January of 2022. The unplanned capability loss factor (UCLF) measures how many times units were taken offline for unplanned outages. In 2012, Eskom’s UCLF was 8%, but this number had increased to 20% in 2021. Load-shedding had worsened, with December 2022 having recorded the highest amount of load-shedding ever.

Ms Peters explained some of the historical and structural challenges that TransNet faces, with this SOE’s declining performance and its financial position being constrained. TransNet had seen a decline in coal and iron-ore exports in 2021, which resulted in its targets not being met.

Government contingent liabilities, which were liabilities that may occur in the future, were increasingly driven by the government’s guarantees to SOEs, which contributed negatively to the fiscus given the weak financial and operational position of most SOEs. The total guarantees had been were 12% in 2019/20, increasing to 12.4% in 2021/22. This was concerning, because the conditions attached to these grants were not always clear. The reason for seeking guarantees was also a cause for concern, because they generally arose due to bad governance and costly policy decisions.

As for the basic income grant, Ms Peters said that KwaZulu-Natal (KZN) was the largest recipient of this grant, totalling around R42 billion as of 2021. The Northern Cape was the smallest recipient of this grant.

The social relief of distress (SRD) grant assisted citizens during unforeseen economic downturns. A special COVID-SRD grant had been introduced in 2020 to the value of R350, but this was said to be phased out of the system by March 2024. The bulk of the recipients for this grant were aged between 20 and 35 years old, comprising 53% of the total applicants for the COVID-SRD grant. This highlighted even further the importance of providing employment, particularly as the bulk of the applicants were made up of youth.

Ms Peters explained that the largest portion (40.6%) of the applicants for the relief grants held a matric qualification, and 39.3% of the applicants held a grade 10. This further pointed out the level of unemployment that the country faced, even with people who had some level of schooling and education. In 2022/23, the FFC found that R5.5 billion in ‘savings’ were declared by the Department of Social Development in respect of the SRD, but given the vast number of applicants who applied for this grant, it proved that many applicants faced the challenge of eligibility and administrative hurdles.

The budget presented limited scope for increasing social assistance, including a basic income grant. The FFC required clarity from the government to confirm if a basic Income grant would anchor the existing social assistance networks, or alternatively, whether implementing a universal BIG would replace existing grants to establish one grant. She added that it was unclear how long this process would take.

Existing trends in tax revenue distribution had been studied to determine how the BIG would be financed. The graph presented a figure for 2023/24 taxable income within the different income groups, with an increasing slope towards the higher income brackets. However, there had been an unexpected dip in the households falling into the R750 000 to R1 million annual income bracket and the R1 million to R1.5 million income bracket. In this situation, the FFC would typically expect a revenue line higher than the trend shown on the graph. She attributed this unexpected trend to people struggling to get into the upper-middle income class, which explained the drop in income tax payable for these two brackets. Should tax revenue be used to finance a basic income grant, the uneven and non-distribution meant that pressure would be unfairly placed on the middle-income group. 

FFC's recommendations

The FFC’s recommendations were categorised according to the SOEs and the BIG. Starting with the SOEs, the FFC recommended that National Treasury (NT) collaborate with the SOE parent departments to do excessive resource extraction, by providing explicit guidance to the SOEs on the expected period of return and the investment and distribution of profits. The FFC also suggested that the Treasury reduce the fiscal risks that come with SOE borrowing, which could be done by establishing safeguards to prevent the SOEs from becoming too indebted. Lastly, the FFC suggested establishing a centralised holding company, which was backed up by evidence from their research.

As for the BIG, the FFC suggested recalculating the SRD grant, which the FFC would be willing to provide guidelines for. Secondly, they recommended that the Minister of Social Development and the South African Social Security Agency (SASSA) be held accountable to the public for their R1.8 billion and R3.7 billion ‘savings’ which, according to the FFC, was under-spending. The Minister of Social Development should develop tools that link the unemployed to employment, education and training opportunities.

Learner-teacher support material and transport

Mr Sabelo Mtantato, Senior Researcher, FFC, said he would lead the Committee through two chapters. The first would be focused on learner-teacher support material (LTSM) and transport, and would be applicable to the provincial sphere of government. The second chapter would be focused on local spheres of government and municipalities.

Textbooks (and other learning materials) and transport were two vital aspects to ensure every learner could practice their right to education. Many learners in South Africa lived far away from their schools, so there needed to be a means for them to get to and from school every day. Another aspect of this would be school nutrition programmes, as many learners came from poor backgrounds and often went to school without eating breakfast. Chapter two looks at the policies and regulations around LTSM and learner transportation. Most of the funding that provinces receive is used for the compensation of employees, with approximately 75% of the funding going to the salaries of teachers. This left a very small amount to be allocated to the main focus areas of the chapter.

An LTSM policy had been drafted in 2015 but had still not yet been finalised. It was critical to finalise this policy because the world was moving towards technology through the mode of e-learning, meaning that the use of technological devices may become just as important as the use of textbooks. Another point was the fact that funding for learners in different grades varied, which brought forth a noticeable gap in the FFC’s findings. The ability to provide access to textbooks was central to addressing the learners’ difficulty with reading and learning at different levels. The strengthening of monitoring evaluation was also important, so this should also be a priority.

Concerning learner transportation, the study found that the demand for learner transport had increased from 2014 to 2022, but there were inconsistencies in the actual number because the information received from the various departments differed a lot.

FFC's recommendations

Recommendations were grouped into two groups.

Firstly, the FFC suggested that the Minister of Basic Education approves the draft policy of 2015 and that the Ministry prioritise the funding for learner-teacher support materials, especially in quintiles 1, 2 and 3 schools. National funding norms needed to be developed to guide the funding for each learner in each phase of their school career. Learners with special educational needs should receive specific priority. Mr Mtantato also suggested that the Minister of Basic Education implement a programme that improves the reading for meaning in schools across all nine provinces.

As for learner transportation, the FFC recommended that the Department of Transportation and Department of Basic Education improve their data collection and reporting to ensure an accurate representation of learner transport. This data should be made public through annual reports. The FFC also noted that infrastructure delivery should be planned in such a manner as to keep learner transportation to a minimum. There should be a focus on building new schools in areas where the learners need to travel the furthest to get to school. The national and provincial treasuries should develop a new funding model for learner transportation. Lastly, he said that the provincial departments responsible for learner transportation should develop systems to verify the number of learners transported through the learner transport programme annually, to ensure that annual changes were captured and accounted for.

Impact of climate change

Chapter four addressed another urgent matter -- climate change. Mr Mtantato reminded the Committee of the impact climate change had had on the country so far, especially in terms of flooding in provinces like KZN. The FFC’s findings indicated that municipalities were aware of the urgency of climate change and its impact. These municipalities also knew there needed to be a response plan to climate change, but they failed to implement this because they did not have the skills and funding to address the issue. The integrated development plan (IDP) analysis review indicated gaps in actioning, implementing and prioritising a climate change response by municipalities which could be attributed to the lack of skills and plans that needed to be approved by councils. The findings also suggested that municipalities were reactionary in response to climate change, instead of taking a proactive stance against the matter. The results of the budget analysis indicated that municipalities that had allocated funds to climate change had indicated only a small amount (approximately 1% of the total budget). On repairs and maintenance of infrastructure, it was found that municipalities spent less than the 8% necessary amount.

FFC recommendations

The FFC recommended that the national Department of Forestry, Fisheries and Environment (DFFE) and Cooperative Governance and Traditional Affairs (COGTA) should spearhead integration, coordination and implementation of climate change responses. The Department of Monitoring and Evaluation (DPME) and the Presidential Climate Commission (PCC) must play an active role in terms of monitoring and reporting on progress made by sub-national governments. National Treasury, together with COGTA and the National Department of Public Works and Infrastructure (DPWI), should revise formats for the infrastructure grant frameworks to include climate change response specifications. Lastly, the FFC suggests that the Minister of Finance should cater for the budget to be sensitive and responsive to climate change.

Spatial inequalities and efficacy of municipal spending

Ms Gianni Donne, Researcher, FFC, said she would lead the Committee through chapters five and six, touching on matters such as spatial inequalities and the efficacy of municipal spending in driving local economic development.

Municipalities played an essential role in economic development by providing essential services, but local government was also envisaged to play a driving role in economic development. Regarding basic service provision, municipalities were entitled to grants from the national fiscus to fund some of their operations. However, it was crucial for municipalities to source their own funding to sustain the municipal division. The assumption of the 1998 White Paper was that, on average, municipalities had sufficient revenue-raising power to raise 90% of their operating expenditure themselves. The research done by the FFC had two aims -- to examine how spatial inequalities across municipalities influence their revenue-raising capabilities, and to consider to what extent conditional grant spending drives local economic development.

A map drawn using the municipal map methodology showed the percentage of poor households across local municipalities in South Africa. There were stark inequalities across rural municipalities, as they tended to have higher poverty rates, which impacted the municipal revenue rates. Rising tariffs and increased living costs put downward pressure on household budgets, which in turn place pressure on the municipalities and their service delivery capabilities.

On the operational side -- in terms of expenditure between core and non-core spending priorities across the selected local municipalities -- the bulk of the expenditure was geared towards the compensation of employees, and an even smaller amount was allocated to bulk services. A study on the infrastructure grant allocation conducted between 2018 and 2022 showed gross underspending and poor performance of municipal infrastructure grants. She pointed out that internal and external weaknesses were still prevalent. Smaller, rural municipalities were typically the recipients of the municipal infrastructure grant (MIG) to address service delivery backlogs, while larger urban municipalities received a wider scope for grant funding for local economic development.

Ms Donne then led the Committee through the tables presenting information about the impact of grant spending on local economic development. For metropolitan municipalities, the integrated city development (ICD) grant raises local economic development significantly by 1.3%, while the integrated national electrification programme INEP) grant and the national development partnership (NDP) grant raise local economic development by 0.5% and 0.7%.

FFC recommendations

The FFC recommended that the Minister of COGTA and Minister of Finance critically review the local government fiscal framework. To account for large spatial inequalities seen across municipalities, a differentiated approach was needed to ensure that policies were tailored to overcome the unique circumstances that municipalities face. Since the White Paper assumption was no longer credible, the local government fiscal framework may need to be radically reconfigured.

Secondly, the Commission recommended that COGTA and Treasury develop an appropriate funding mechanism/plan in a phased and targeted approach which should be aimed at enhancing the municipalities' abilities to spend the development grants effectively. The district development model (DDM) should be strengthened and financed for local government to fulfil its developmental role.

Lastly, the Commission suggested that any future framework development on local economic development should include the aspect of skills development through the revitalisation of mentorship programmes to address the country’s unskilled labour issue.

Municipal cost recovery

Chapter six indicated that municipal cost recovery was not only an important financial indicator of the health of the municipalities, but was also crucial for the sustainable provision of basic services. Broadly speaking, cost recovery was achieved when the average tariffs were aligned with the average cost of services. Due to high consumer debt levels, many municipalities were struggling to recover the costs of providing services. If tariffs were too high, the affordability of services decreased, which in turn negatively affected cost recovery. Recently, affordability has been impacted tremendously by high inflation and the current cost of living crisis. The Eskom price increase approved for the 2023/24 financial year would also impact affordability. Therefore, this research had two aims -- primarily to assess the extent to which municipalities recover the costs of providing services, and also to look at the relationship between cost recovery and affordability of services. The second objective was to examine whether socioeconomic features of municipalities influenced the cost recovery outcomes.

Ms Donne showed the cost recovery levels for each of the basic services provided by the municipalities. What could be seen from the data was that there were low coverage levels for electricity, water and sanitation. This was concerning, given that historically municipalities had generated surpluses in these services, which had then enabled them to cross-subsidise their services. The variance in cross-coverage levels across municipal categories could be partly explained by the difference in revenue-raising capabilities, socioeconomic factors, and non-payment.

The norm for the municipal revenue collection rate was 95%, and in the 2017/18 and 2018/19 financial years, the collection rates for Category A municipalities were above the 95% norm, but the collection rates for other municipal categories fell below this norm. The FFC had previously noted several factors that contributed to poor revenue collection, which included the customers’ inability to pay for services, some communities’ culture of non-payment for services, billing systems and the failure to create adequate credit control systems.

The research also looked at the correlation between cost coverage and affordability, and the presentation depicted this connection for both the affordable range of bills per service and the indigent households. Most of the correlation codes were negative, suggesting that, on average, municipalities with lower bills as a percentage of income tended to accumulate higher cost coverage levels. The results also suggested that overall the average municipalities that had more affordable municipal household bills tended to have higher cost coverage levels. The strength of this relationship between cost coverage and affordability was typically weak and negligible. This meant that affordability was not the only factor influencing cost coverage.

Considering socioeconomic features, the analysis had been extended to amend the cost coverage of each service. Variables such as GDP per capita, the municipal unemployment rate and median income were taken into consideration. All the correlations were positive for the median income, suggesting that municipalities with a higher median income had higher cost coverage levels. A similar finding was found for the GDP per capita variable. The relationship between unemployment and cost coverage was negative, suggesting that municipalities with higher unemployment typically had lower cost coverage levels.

FFC recommendations

The Commission presented four recommendations for this chapter.

It suggested that National Treasury, in consultation with SALGA, CoGTA and provincial governments, should urge local municipalities to apply effective revenue enforcement and credit control mechanisms and improve billing and accounting systems. Secondly, the Commission reiterated its previous recommendation that CoGTA, in consultation with the South African Local Government Association (SALGA), should ensure that the credit control systems of Eskom and municipalities were aligned, and that Eskom should essentially assist municipalities in its credit control measures. It recommended that SALGA, through the “Asisho! Let’s Say it” campaign, should incorporate innovative approaches to increase awareness about the importance of paying for municipal services. Finally, the Commission recommended that National Treasury urge municipalities to assess the affordability of the total municipal Bill as part of their tariff-setting process.

See attached for full presentation

The Chairperson thanked the Commission for their presentation. She reminded the Committee that there were more documents on this report online, and that the actual document was much larger than the presentation. She then gave the Committee an opportunity to ask their first round of questions.

Discussion

Mr Fry said it appeared there were 99 problems, and the Committee could not afford another shock. Regarding slide 18, the fiscal and social policy recommendations were good, but he asked what the likelihood was of them being introduced and actioned on. The recommendations at the end of each chapter were very good, but the Committee knew it would be difficult to implement these recommendations. Slide 21 showed Eskom’s liabilities had lessened over time -- could the Committee perceive this as a sign? He commented on the problems with the SOEs that were a consequence of poor management and supply chain principles that were poorly implemented. Would the Commission’s recommendations really hold unless there was a total overhaul of the entire system?

Ms N Nkondlo (ANC) said she was happy that the presentation dealt with the issue related to the assumptions in the White Paper regarding the fiscal abilities of the municipalities. She said that to date, without even having to spend much time in terms of technical research, and the kind of realities that were lived experiences of South Africans, some of those assumptions did not hold true. It was easy to make a comparison of municipalities and provinces. She was unsure if the FFC had done a comparison from a growth perspective, instead of comparing apples to oranges. Each province experiences different growth trajectories, which made it difficult to compare the growth prospects of the Western Cape and Limpopo, for instance. Did the Commission have a tool that could be used to measure the growth of the provinces within their own levels of economic growth?

Her second question was related to cost recovery of municipalities. She asked if there was a case study of any of the municipalities that were actually very close in terms of their cost recovery methods which were informed by data on household incomes. She noted the outcry from middle-income earners in Cape Town because of the increased tariffs, especially electricity tariffs.

Her last question referred to local economic development. She asked if the notion of local economic development was real within the municipalities and if it was robust enough to realise the assumptions made. She noted that the municipalities were rarely able to produce data about local economic development, which led to serious misalignment in data capturing.

Ms C Murray (DA) said that the Standing Committee on Local Government had recently visited the municipalities of Beaufort-West and Laingsburg. It had been eye-opening on the issues relating to expenditure at a municipal level. There had been a lot of success with the financial rescue plan that had been deployed, but there were some issues that she was unsure of in the context of whether they were identified in the report. When it came to information communication technology (ICT) auditing supply chain finance, one could see that there was no staff capacitation, so this put the validity of the audit in question, because an audit could not take place if there was no functioning IT department. She asked if the Commission could address this issue.

Another finding was that the operating expenditure (OPEX) was usually much higher than the capital expenditure (CAPEX), which was supposed to be common practice in underfunded projects. However, there were issues in under-expenditure with CAPEX and when the municipalities were interrogated on this, they said it was because they received grants for CAPEX, but the conditions of these grants did not align with what was needed from the municipalities. One of the major complaints in Laingsburg was around the ICT system, and that they could not upload data streams correctly, and thus the financial information was reflected incorrectly because the equipment was outdated. The CAPEX grant could not be used to address this. Ms Murray pointed out that IT plays a major role in auditing and financial outcomes. There seemed to be a lack of training and ability to upload information correctly. When the Committees asked for financial information from the municipalities, they were provided with incorrect information. She asked if the Commission could comment on this and address any incorrect assumptions she may have made.

The Chairperson commented that Laingsburg happened to be her constituency, and noted that everything that involved governance did not function properly. Sometimes the municipalities failed to inform that the money was not there because of bad governance. She pointed out that if the municipality’s funds were not being governed correctly, it was hard to argue whether they were delivering or not delivering on their respective services.

With the lead-up to the FFC’s 30th anniversary, the Chairperson wished the Commission well, and said she hoped that National Treasury and Parliament would take these recommendations seriously. The presentation presented to the province would be given to other provinces, and were based on national figures across municipalities and provinces, thus not making them specific. She suggested that there may be scope for the FFC when they did their respective submissions for the next financial year, saying that they should include not only the national figures, but also the individual figures relevant to the provinces. Something that had always been important to her was the provincial equitable share, and the FFC was well aware of how the Committee tried to dig into the provincial equitable shares. National Treasury was busy with the education input, which would likely greatly impact the provinces.

Regarding slide 20 on SOE governance and financial issues, the government had paid over R162 billion to financially distressed SOEs over the past 12 years, with Eskom receiving over 80% of the total amount. The Western Cape budget in itself was about R66 billion, which means over 12 years, government had essentially bailed out Eskom with twice the Western Cape’s budget size. She asked how money was allocated in the National Budget for the provinces’ provincial equitable share when they were first cutting the pie with the SOE bailouts. This meant that instead of doing a cost analysis to ensure the provinces had what they needed, the pie was decreasing for provinces and instead, they were fighting with one another as to who got what share of the smaller pie. Provinces should be getting the first priority before they start looking at bailouts, which were caused in and of themselves by the respective institutions. Why were the provinces being put in a weakened position because the SOEs were receiving first priority, when in fact, government could diversify the energy transmission generation distribution and the services relating to things like ports? She also asked how the provincial equitable shares were calculated between all nine provinces, and if the budget for the provinces was big enough, to begin with, before it was divided up between them.

She made a recommendation about the recommendations in the presentation, noting that the Western Cape was already implementing a number of them. In the province, the learner-teacher support material budget was already being utilised to supply electronic materials and supplies. Mr Fry also sat on the Education Committee, and he could verify that the schools were usually questioned about what they used the funds for. It was up to each individual school’s own discretion how many textbooks and supplies they ordered out of their own budgets each year. They were encouraged to use the entirety of their budgets each year, because the Department of Education did not advise school governing bodies (SGBs) on what they needed to buy and provide in their own schools.

The Chairperson suggested that the FFC and National Parliament have a resolution based on the annual submission of the FFC, where the respective departments mentioned in the resolutions must annually and quarterly give feedback on the progress of the implementation of the recommendations. Otherwise, this would always just be a document. Some recommendations had been made ten years ago that Parliament was beginning to implement only now. Similarly, when referring to a province, the FFC should submit the still outstanding information if they struggled to get it from the province, and should then approach the respective province’s Budget Committee and ask for their assistance. She also suggested that there be a provincial resolution register.

FFC's response

Mr Sachs thanked the Chairperson and the Committee Members for their questions and spirited opinions. He said he would take up the Chairperson’s recommendations about resolution registers.

Referring to the bailouts, he acknowledged these bailouts had affected everyone. A month ago, a Treasury circular had been sent out to all accounting officers to somehow find 10 to 15% of their budget to cut. Sometimes the SOEs felt too far out of reach, but their impact was definitely tangible on the division of revenue. Furthermore, they could not withstand another shock -- not just economic, but also shocks within the country like the bailouts and special appropriations laid out before the budget process for 2023/24. There were also other shocks, like social protection. There were so many grants in the system, as well as funds that were set up or advertised, that the FFC recommends these funds should be consolidated and brought together so that they did not lose their impact. There were so many grants geared toward helping citizens, but the matter of their impact was related to the economy’s scale.

He said the issues Eskom faced were self-inflicted. The ex-CEO, Mr De Ruyter, had been dealing with a need for institutional overhaul, which meant a lot of it was related to years of redundancy and inefficiencies within the infrastructure of Eskom. At this point in time, government had put in so many resources that they were still not able to fix the issues that had arisen with the other SOEs. The FFC had advised against the special appropriation approach in dealing with these failing SOEs. The Commission did not advise against the funding of the SOEs, but there needed to be conditions put in place when the funds were granted to bail these SOEs out. Some issues had arisen with the Special Appropriation Bill, essentially making the Bill dependent on subjective and investment decisions from the Minister of Finance. The fundamental method of funding had not changed, and this was a problem.

The fundamental tenet of fiscal decentralisation was correct, because it allowed the people who were closer to the ground and the local economic opportunities to make decisions. The comparison had been very one-size-fits-all, he admitted, but he acknowledged that this may not be the case, and that was why the map had been added to the submission to show how diverse the socioeconomic fundamentals were driving municipal activities. What could not be shown yet on paper was that on a national view, they should be able to zoom in on the provincial regions, municipalities and wards to ascertain what streams and rivers there were, what soil could be used for farming and which areas could be utilised for economic growth. This would soon be the standard of measure. Alongside this tool, the FFC hoped that once the map had been developed, they could zoom in on the household incomes in various municipalities to look at the local government’s cost recovery.

As for Ms Nkondlo’s question about whether the local economic development was a functioning practice, there was proof that there was significance coming from these municipalities. Unfortunately, there was no local economic development effect on a national scale yet.

Mr Sachs appreciated Ms Murray’s questions, but clarified that ‘capacity’ did not mean more support. Many people fulfilled the administrative, institutional support role, but there was a notable lack of support in the area of delivery. ICT, supply chain and finance reporting, which the Auditor-General (AG) was auditing on, were critical but basic, in a sense that they should come without stressing about it. The FFC was working with the AG because the AG had the advantage of going into the municipalities for the financial management audit strategy plan. The FFC would join them with their research capacity to look at under-expenditure and grant expenditure. The FFC had developed a healthy suspicion of the way that these under-expenditures occurred because while the root cause was the conditions of the grants, the issue of ICT had more to do with procurement. In this respect, the FFC would look at procurement and the effect of the Public Sector Procurement Bill that was in place.

Mr Sachs added that there was a need for the process of vertical division of revenue to be transparent. This would require the National Council of Provinces (NCOP) to work through their ministers and the executive branch of government.

Further discussion

The Chairperson said that if the national government was not interested in the resolution register, she would still advise that one be made for the Western Cape, because all of the recommendations would remain relevant to the province. The legislative criteria for a Special Appropriation Bill in South Africa was that the problems that required appropriation were unforeseeable. She added that no one could argue that the bailouts for Eskom were unforeseeable or avoidable. She opened up for another round of questions.

Mr Fry said he had served on the City of Cape Town’s Climate Change portfolio. The City had the no-carbon footprint by 2030 strategy plan in 2018, and along with Durban, it was a leader in addressing climate change adaptation, mitigation policies and resilience and the effects of climate change. Should the cities not showcase that they were part of the C40 Cities Climate Leadership Group, more than they had to prove they were taking an active role in climate change? Would it be fair to use real-time examples to address climate change?

He also noted that there were problems with income generation in rural communities. He asked if towns with a rich cultural heritage should be empowered to promote rural tourism. For instance, Hermanus was a small town with very little tourism, and now it is a popular town with a thriving tourist economy.

Lastly, he addressed the issue of ward councillors not having the necessary education and the administration not having the necessary expertise to govern at that level. He referred to a meeting he attended in 2019, where SALGA had said that 25% of the Western Cape’s ward councillors did not have matric. This figure could go even higher, and this was a problem because the province did not have adequate capacity-building qualities to uplift the municipalities.

Ms Nkondlo referred to the spatial inequality in South Africa. She noted how important these discussions were, especially when analysing the FFC's research about the problems the country faced. It was even more important to diagnose the root problems to produce indelible results. She was happy with the FFC's responses, but asked if something could bring the different spheres of government together to deal with the spatial inequality. It was a persistent problem, but had not received much attention. Countries like China had put measures in place to ensure that rural communities that struggled with poverty were lifted out of absolute poverty. Across all nine provinces, one could see pockets of different citizens in the country. With the different policy interventions that the FFC suggested, did any of these interventions confront spatial inequality?

One of the challenges she encountered was grant funding. She asked if the FFC had found an improvement in grant spending at a municipal level, because the numbers were a great promise if the spending was done appropriately in the municipalities. If infrastructure challenges were met with the grants, this could even increase employment. She asked when the FFC predicted the municipalities would reach a balance between cost coverage and affordability.

FFC's response

Mr Sachs said that generally, clean audits went hand-in-hand with better expenditure outcomes because financial reporting was rudimentary -- it was the first step to follow after expenditures. Regarding Mr Fry’s question, he responded that not only did the quality of qualifications that the administrative officials obtained need to improve, but so did the oversight mechanisms for ward councillors. He said that sometimes identifying the root cause went deeper than the surface level, so some officials needed to dig deeper for the truth. Overseas there had been qualifications and exams for all civil servants, but even that may be a challenge because there would then need to be public sector oversight by officials who understood the challenges and would be able to ask the right questions to dig into the real root cause to address and maintain that quality issue of the capability and capacity question of the municipalities. The first step would be the qualification that councillors should at least pass matric.

As for the cultural heritage and aligning it with the question of the inequality factor, as brought forward by Ms Nkondlo, the literature was not very clear about how to address inequality if one asked the really tough questions. Dealing with slightly and extremely unequal societies such as ours, policy often suggests redistributing resources more efficiently. However, together with the empowerment at a local level of cultural heritage, this would have more longevity and structure in the manner of addressing the issue of inequality. He pointed out that inequality was a structural problem. Improving local economic activities such as rural tourism would advance and champion the cultural heritage of the local economy. This would be more appropriate to address the issue of structural inequality.

Mr Sachs said that in China, they knew they had masses of people, land, and advantages in terms of power generation, and this lesson could be learnt in South Africa. China leveraged the capital that flowed from the world. They did not pay attention to the colour of the people who were providing them with funds -- they just utilised them for what they were there for to incentivise businesses and citizens. South Africa could essentially be the engine for Europe because of its geographical location.

Regarding the infrastructure development in Cape Town, Mr Sachs suggests that the municipality thinks more energy-efficiently in the sense that streetlights should be LED lights instead of halogens. As seen in city development plans, water retention and retrieval should be improved. These opportunities deserved to be championed, with or without the climate banner.

Further discussion

Mr Fry asked if the cyclical nature of inflation exacerbated the inequality problem, and what could be done to alleviate this. He referred to slide 12 of the presentation, asking if the agricultural exports were more than shown on the graph.

The Chairperson asked what role the constituents played in local economic development. When it came to municipalities having economic strategies, some municipalities did not follow the strategy because they did not have the funding to do so. For example, in Laingsburg, the municipality could not even finance paving. She pointed out that a ward councillor had commented once that the wards did not even have the money to put pavements down to ensure the people walked on pavements instead of in the street with vehicles passing by. She asked what role the constituents had in enabling the environment of job creation.

Secondly, she said that if politicians did their job correctly, they would become obsolete. A politician’s main purpose was to put systems in place to better the environment of the people they represented. She pointed out that a politician was supposed to handle the problems that government often was not even aware of, in order to fix the system. The solution to Laingsburg’s ICT problem was not complicated. If one were to look at a municipality that had a well-governed ICT system, and they assisted Laingsburg with their ICT issues, this could potentially solve their problem. This task needed to be done at a local municipal level. She truly believes that it is up to everyone in the meeting to help each other to help themselves.

FFC's response

Mr Sachs said it was regrettable how difficult it had become to do the right thing, especially for politicians in their respective roles. Their resistance had got to a point of negative force that had grown exponentially. Regarding the challenges the Chairperson had pointed out, he reminded the Committee that the AG did very basic audits. Looking at the trajectory of audit outcomes, it explained some of the challenges. He agreed with the Chairperson that this was a very difficult matter to deal with.

Regarding Mr Fry’s question about cyclical inflation, he acknowledged that it was, in fact, cyclical because it went hand-in-hand with economic growth. The assumption was that it was not always cyclical, because inflation had to do with hyper-demand. The treatment for this would be the monetary policy of increasing interest rates. However, this did not address the situation if the inflation was supply driven. The FFC addressed this issue in the presentation, referencing the global supply mechanisms that drive supply, such as oil production during the Russia-Ukraine unrest. People were advised to scale back on their demand to remedy supply-driven inflation. This kind of shortage that caused inflation was not treatable by monetary policy. The challenge in South Africa came about when everyone treated inflation as demand inflation -- for instance, treating this as hyper-demand and the interest rates being increased. This resulted in the weakening of the currency, which in turn could be harmful to the national debt, especially when the debt portfolio was based on foreign currency. If the exchange rate was not kept constant, South Africa would be in the same position as Turkey, which had recently experienced 70-100% inflation rates.

Further discussion

Ms Nkondlo commented that the Committee would always have interesting conversations with the FFC because they had a platform outside their political environment to deal with data to understand trends. She suggested that infrastructure-led growth should be something the Committee should consider in the future. At a simple level, if one were to consider the City of Cape Town council, they had passed a R43 billion budget for infrastructure for the next three years, making it the first City to do so. The City’s council had also approved another budget that would go towards ending load-shedding. However, she pointed out that while these budgets were being approved, the City had an unemployment rate of 26%.

When discussing the concept of infrastructure-led growth, she asked whether, by passing these huge budgets, the councils and municipalities could say for certain how many job opportunities would come with these huge investments. Considering the billions of rands invested versus the number of jobs created, these strategies always seemed to lack absorption of unemployed people. There was often a gap between what was invested and what was reaped in return regarding what was required in terms of employment. She hoped that a tool could be used to say that with the lump sums invested, “x” amount of job opportunities or household service deliveries would be reaped from this. She suggested that the FFC look into a tool such as this, because by determining how many jobs would be created by the investments, the government could begin combatting the high levels of poverty nationwide.

The Chairperson added that the overview of estimates for all departments was tabled at the beginning of every year at the Budget Committee meeting. The Western Cape Budget Committee identified problems in individual departments and when they took them on, they zoomed in on the finances of these departments. The respective information was then sent to the respective committees of their respective departments, and they hoped the recommendations would be put in place. The Western Cape Budget Committee had said when they did eventually have documentation before them, they wanted it to mean more than just legislation so that when the budget come, they did not look only at figures, but had a comprehensive document with recommendations, suggestions and information that had been fed back into the system. She noted that people were often unaware of how much information the Budget Committees received, such as budget outlines, quarterly and annual reports, municipal and economic reviews, and annual reports per department. The Committee was made up of only five Members, and she encouraged all the Members to attend the budget meetings because what may be discussed could relate to the Members’ own portfolios.

Regarding infrastructure-led growth, the Chairperson said they were often faced with two questions: How were the criteria set for measuring infrastructure-led growth, and how did the Committee measure itself? How did the Committee take and apply the information that the FFC provided them with? She said this would be a question for another meeting in the future.

Committee matters

The Chairperson took the Committee through the approval of the set of draft minutes of a previous meeting.

She asked if the Members agreed with the suggestion that the FFC have a tracking document for the recommendations made in the FFC submission for the Division of Revenue Bill for 2024/25, which the National Parliament and the provincial committees would consider. The Members agreed that this would be a good resolution.

The Chairperson thanked the Members for attending and engaging in the meeting. She wished them a wonderful weekend, especially if they celebrated Women’s Month.

The meeting was adjourned.