Division of Revenue Amendment Bill: National Treasury briefing & public hearings

Meeting report

Delay in start of meeting
The meeting start time was delayed as the Chairperson alerted the Committee to the fact that the Division of Revenue Amendment Bill had not been formally referred to the Western Cape Provincial Parliament (WCPP). The Chairperson was concerned that the Committee would operate unprocedurally and illegally if it went ahead with the meeting without actually receiving this referral from the National Council of Provinces (NCOP).

In the absence of the referral letter, Adv Andre Le Roux, WCPP Legal Advisor, provided legal advice to Committee, commending the Chairperson for her comprehensive comments at the start of the meeting.

Adv Le Roux explained that Rule 217 of the Standing Rules of the Western Cape obliged the Speaker of the province to refer all NCOP matters requiring a vote to the provincial Committee.

With the absence of the referral letter, the meeting was postponed and reconvened later in the day when the referral letter had been provided.

[meeting resumes 2 hours later]

National Treasury DORA Bill 2023 Briefing
Members were taken through the presentation.

The presentation covered proposed amendments to the Bill and changes in provincial allocations in 2023/24.

Changes to provincial allocations in 2023/24
-Additions were made in PES for health and education to compensate for the 2023/24 wage
Implication
-Additions were based on the headcount per province in health and education.

Re-prioritisation
R57 million was re-prioritised from the school infrastructure backlogs grant to the vote of the
National Department of Basic Education. Of that amount, R32 million would fund the compensation of
employees pressures; and R25 million would fund information and communication technology
upgrades in the National Department of Basic Education.

Roll-over
R137 million was rolled over in the school infrastructure backlogs grant. Of that amount, R93 million
was for the completion of the projects of the Sanitation Appropriate for Education initiative for schools;
R26 million was for the completion of the projects of the Accelerated Schools Infrastructure Delivery
Initiative; and R18 million was for associated management costs. The funds were for schools in the
Eastern Cape, KwaZulu-Natal and Limpopo

Reductions
-Only conditional grants were reduced in year.
-PES was spared from in-year reductions.
-The school infrastructure backlog grant reduction included the re-prioritisation of R57 million. Of the R260 million reduced, R175 million formed part of the budget consolidation as a reduction for that grant and R85 million was reduced to lower a reduction on the Early Childhood Development Grant.
-The National School Nutrition Programme grant had been protected and a larger reduction had been made to the education infrastructure grant.

Members were taken through th adjustments to the Western Cape provincial allocations for 2023/24.

Changes to Local Government allocations in 2023/24
Declared under-expenditure
R1.4 billion unallocated in the Local Government equitable share was declared as an under-expenditure

Additions
-R1.2 billion was added to the Municipal Disaster Recovery Grant to fund the repair of infrastructure that had been damaged by the floods that occurred between February and March 2023
-R372 million was added to the Municipal Disaster Response Grant to replenish the depleted grant baseline

Conversions
-R10 million from uThukela Local Municipality’s Municipal Infrastructure Grant (MIG) allocation was converted to an indirect allocation for the Ekuvukeni Water Supply Project
-R20 million from Emfuleni Local Municipality’s MIG allocation was converted to an indirect allocation to address the outfall of sewers in Evaton and Sebokeng
-R88 million from the direct component of the Neighbourhood Development Partnership grant was shifted to the indirect component to expedite project implementation in municipalities that were experiencing administrative and financial challenges

Re-prioritisations
-R53 million was re-prioritised from the Integrated National Electrification Programme (Eskom) grant to the vote of the National Department of Mineral Resources and Energy to fund the rehabilitation of derelict and mines that had no owners.
-R309 million was re-prioritised from the indirect component of the Regional Bulk Infrastructure grant to the indirect component of the Water Services Infrastructure grant to enable the Department of Water and Sanitation to manage contractual obligations, budget pressures, accruals and payables for projects in several municipalities

(see presentation for more details)

Western Cape Commissioner of Children Submission: DORA Bill
Ms Christina Nomdo, Western Cape Commissioner of Children, took the Committee through the submission. Some key takeaways are summarised below

Key recommendations for the finance committee to consider on the Medium Term Budget Policy Statement (MTBPS)
• Developing a child-centred and child-friendly governance system
• Considering the debt burden on children
• Cutting Social Sector spending in real terms
• Diminishing the Child Welfare and Child Protection budget
• Reconfiguring the State from a rights perspective

Developing a child-centred and child-friendly governance system
• No mention of children; makes them invisible
• Communications had to be child-friendly, plain language
• Incorporating children’s views
• Recommend: drawings, stories, cartoons, infographics, Tik Toks

Cuts in children’s services in DoRA Bill
• Constitutional framework of child rights
• Vertical and horizontal split
• Child/ren mentioned 105 times in DORA Bill
• Cuts to conditional grants for children’s services
• Child rights impacted assessments needed ASAP

(See presentation for further details)

Discussion
Mr L Mvimbi (ANC) asked for clarity on the budget allocated to the Western Cape, inquiring whether his understanding of a R1 billion increase in the allocated budget for the Western Cape, from R73 billion to R74 billion, was accurate. He asked what the R1.4 billion Local Government equitable share declared as under-expenditure was based on. Was it based on the tariffs that each municipality had to be set on? He asked if any Western Cape municipalities would benefit from the R88 million neighbourhood development partnership grant.

Mr D America (DA) emphasised the changes in the anticipated allocation, which was dealt with in the main budget earlier in 2023. He recalled that the public sector wage increase was factored into the appropriation during the main budget, which was a 3% increase. He explained that when that was presented to the various departments and the Provincial Treasury, they were made to believe that the increase would be 7.5%, as already publicly released by the National Government and the public sector unions. He recalled that the Provincial Treasury at that stage had indicated that it had budgeted 3%, and the National Government would invariably carry the shortfall. He explained that the National Treasury indicated that an increased adjusted allocation of R1.7 billion would be given to compensate for salary increases only in relation to education and health services. He stressed that cumulatively, the cost that all the departments had to bear was well above R1.7 billion. He stressed that somewhere along the line, that shortfall had to come from somewhere, which unfortunately would mean that the services that could be delivered would have to be sacrificed to make up for the shortfall of wage increases. He explained that that was centrally negotiated and settled without the Provincial Government’s input. He asks why that additional allocation was only limited to health and education.

Mr America called attention to the officially known fact that in Gauteng, Western Cape, and KwaZulu-Natal, the migration of people from other provinces was quite high. He said according to Census 2023, the population of the Western Cape had significantly increased over the years. The reduction in the infrastructure grant was a major concern as those cuts would prevent the building of additional schools and clinics to cater to the increase in demand and population. It had become evident that the maintenance of the road infrastructure of the Western Cape had been put under pressure because of the ongoing reductions. To ensure effective service delivery, the need to maintain those infrastructures and build new infrastructures, such as schools and clinics, was dependent on the careful attention being paid to the demand for those infrastructures. He stressed that that caused a major problem as government would be the one who would need to explain to parents and citizens who were all taxpayers that government did not have the money to accommodate the high increase in demand for schools, creating conditions for social instability.

Mr M Klaas (EFF) asked that the declared under-expenditure of R1.4 billion Local Government equitable share presented in the presentation had to mention particulars pertaining to where the money had been saved or where specifically it had been saved from. He said the Local Government faced numerous issues, all of which that money could be used for. In particular, the issue of electricity being expensive which impacted older people. Using that money in the form of grants could help vulnerable individuals, such as the elderly, to afford electricity.

The Chairperson expressed her concern regarding the National Public Sector Wage Agreement. She said the National Government had given the Western Cape government across departments a R2.9 billion equitable share increase (page 4 of DoRA), and there was an increase in equitable share by R1.7 billion to deal with public wage agreements in health and education sectors. Subtracting those two figures from one another meant that National Treasury owed the Western Cape Government R1.2 billion for wage agreements. She stressed that while the budget showed an increase of R1.7 billion, National Treasury was failing to tell the people that the Minister of Finance in the province needed to seek R1.2 billion in the provincial budget to cut. Where was the provincial Minister of Finance going to find R2.9 billion for the public wage agreement that the National Treasury had budgeted for? That was not only applicable to the Western Cape but to every other province which was being shorted in terms of public wage allocations. She stressed that according to her, the National Treasury was only going to cover a small portion of the public wage agreement, which was going to be for the education and health sector only, whereas the other sectors were the provincial government's responsibility. She asked which Provincial department budget in the Western Cape had to be cut to make provision for the R1.2 billion that National Treasury was not giving.

The Chairperson referred to Sections 28 (dealing with children) and 29 (dealing with education) of the Constitution, specifically focusing on Subsection 2A. Reciting from the Constitution, she explained that a child’s best interests were of paramount importance in every matter concerning the child. Section 29 stated that everyone had the right to basic education, including adult basic education and higher and further education. In turn, she stressed the fact that education was an immediately realisable right. She said the budget on education was cutting the conditional grant of education infrastructure in the Western Cape by R156 million, despite the indication being an immediately realisable right.

Additionally, the budget was also cutting the early childhood development grant by R14 million, the HIV and AIDS Life Skills Education Grant by R3 million and the Math, Science, and Technology Grant by R4.2 million. She said that without getting to the other infrastructure grants, the total reduction in conditional grants was R642 million, which accounted for the majority of infrastructure across departments. That total did not consider the R1.2 billion that the National Treasury had decided not to give the Western Cape. She asked whether the National Treasury would take responsibility for the legalities that could occur once the citizens of the country sued provinces for not ensuring that education was an immediately realisable right.

The Chairperson stated that in terms of the new Census data, the Western Cape was the fifth-largest province in terms of population, which played an important role in the provincial equitable share formula, as the population statistics made up the majority of the formula datasets, essentially meaning that when the population increased or decreased, it substantially changed the amount of provincial equitable share each province got from the National Government. She explained that currently, regarding the new census data available, the Western Cape was the third-largest province in terms of population compared to being fifth previously; however, there was still no indication of when those datasets would be incorporated. She said there had been discussions regarding the date, which indicated that it might be incorporated by June or July 2024 for implementation towards 2025, but that was way too late due to ongoing pressures already occurring. She stressed the need for and the importance of expediting the incorporation of the increase in population data and its datasets for the February main budget, as currently "money was not following the feet."

Responses
Ms Nomdo said her role was created by the Western Cape Provincial Parliament and started on 1 June, 2020. She highlighted that the purpose of her term and role was and had been to make the "little voices count”. Since the beginning, she had worked in full partnership with children from the inception of her office, and her mandate indicated that she was concerned with law, policy, and practice reform. She expressed her joy by explaining to the Committee that children had been partners in the processes of law, policy, and practice, particularly with reference to budgets. She explained that in 2021, children listened to the medium-term budget speech by the National Minister but were confounded as they did not understand the foreign language and technical terms being used. Since then, the office has tried hard to include children in budget processes by teaching them the “budget language” as well as teaching them how the government worked. That was achieved through a fun and interactive way with games being the main form of teaching.

She said the Child Government Monitors (CGM), which totalled 17 and herself, convened on WhatsApp chat groups every Wednesday, where they discussed issues, such as the lived realities of children in the Western Cape as well as the issues that they wanted, herself as the Commissioner, to act upon. The mandate gave them the powers to communicate with the Minister of Finance and National Treasury in relation to the MTBPS.

Ms Vimbai Watambwa , Child Govenrment Monitor (CGM), said the Office of the Commissioner helped to promote and protect the rights of children in the Western Cape Province, as stated in the mandate. The Commissioner directly worked with children to help educate and equip children on the “big and un-understandable” government budgets which were done through workshops. She has had the privilege of being part of the CGM since July 2020, and the first-ever budget workshop was on the provincial budget, whereby the Commissioner explained the horizontal and vertical cuts to them. She highlighted that during that workshop, the process of how money was shared between the national and local governments was explained, as well as how money within the provinces was being shared after all the expenses were done.

She said the most recent budget training was in July 2023 which focused on the local government budgets with a focus on the Integrated Development Plans (IDP) of three different communities. She highlighted that based on the workshops they had undergone, they noticed that the MTBPS did not mention anything regarding “children”. Stressing that “no words or anything connected to a child” were mentioned in the MTBPS. In the DoRA Bill, she noticed that the word “child” was mentioned more often, with it specifically being mentioned 66 times throughout the document. She highlighted her excitement based on the fact that children were being acknowledged; however, she was disappointed to notice that those acknowledgements were all related to budget cuts which directly and negatively affected children. The educational infrastructure, health, and nutrition grants were being cut, making her wonder: “Do the big ladies and men in suits think of the little voices when they’re making decisions at the big tables?”

Ms Nomdo said the main point that she and the children were trying to make was that the budget process and, in general, the governance system in South Africa was not “child-centred”. Children were not at the centre of planning, and that was a major problem for her as it meant that the country was not future-oriented or rights-oriented because children were at the centre of society. We would need to have a viewpoint that could look into the future rather than just the present and short term. She expressed her thanks to Members of the Committee, the Acting Premier, and members of the Provincial Treasury for supporting the efforts of the WCCC and CGM since 22 July 2022, which helped build the capacity of the children to understand those technical terms and to make it possible so that they could now speak in government.

She highlighted that the debt burden on children was great and that that passed from generation to generation, which she was concerned about as the implication was that children were inheriting large amounts of debt. She explained that taxes were of a major concern as the children appealed to her and she then appealed to the National Parliament that it had to not raise the value-added tax (VAT). She explained that an increase in VAT had a detrimental effect on children directly as children were taxed when buying sweets, necessities that their families buy, etc. She appealed that those things had to be exempted from VAT, however, only a small portion of goods was exempted from VAT, thus an increase would put a major burden on the poor.

She had appealed continuously, particularly in terms of DoRA and the way in which money was being spent. She explained that health, education, and child protection were important budgets that needed to be protected in the budgeting system. She highlighted that those budgets could be protected through conditional grants as those monies were “ringfenced”; they could only be used for those specific things and not other things. She expressed her dissatisfaction and distress regarding the amendments and adjustments being made to the conditional grants in the social sector, appealing that she would like to ask questions related to those adjustments and amendments. She had heard that government was also planning to reconfigure the state and according to her, based on what she read, the reconfiguration was going to be based on the economic efficiency of programmes and operational efficiency of programmes.

She referred to what the Chairperson pointed out earlier, indicating that rights needed to be followed and respected. The constitutional framework ensured that children’s rights were a priority and therefore she appealed to the National Government and National Treasury. She explained that budgets had to be more user-friendly, particularly in terms of making them easily readable by children. She highlighted that in the February budget, she would like to see child-friendly tools such as infographics, cartoons, and even TikTok skits and Instagram reels being used at the request of the children. She asked that for that discussion, she would like to understand from National Treasury how it was protecting the rights framework in the country, especially the immediately realisable rights of children. How did National Treasury consider when vertical and horizontal splits were done? She requested that she and the children would like an explanation regarding the cuts to conditional grants for children's services. She stressed the fact that the children of this country and of this province would like an explanation from National Treasury about how it was possible for them to abandon their obligation to fulfil children’s rights. She placed particular emphasis on the need for an explanation regarding the cuts such as the early childhood development grant and school infrastructure backlog grants. She asked that the National Government help explain those reductions to the children by providing the tools to understand and explain those massive cuts.

Response by National Treasury
Ms Mary Matjeke,  Deputy Director-General: Intergovernmental Relations, National Treasury, first addressed the questions posed by the WCCC and CGM, acknowledging that the budget was not child-friendly and expressing appreciation for the recommendations to make it more accessible to children. She committed to sharing those suggestions with the Communications Department and the Budget Office for consideration during the drafting process. She acknowledged government's transparency challenges in public participation and pledged to raise those concerns with the relevant divisions within National Treasury.

Regarding budget cuts affecting children, National Treasury had prioritised Social, Health, and Education (SHE) departments at both national and provincial levels as they directly impacted children. While resources were limited, she affirmed the effort to focus on those critical areas. She acknowledged the concerns about educational infrastructure cuts potentially causing issues like overcrowding due to population migration but emphasised that tough decisions had to be made to extend the longevity of current finances. She mentioned government's revenue sources, including international loans and taxes such as VAT, assuring that concerns about VAT increases would be shared with the Minister. She clarified that South Africa faced fiscal challenges, leading National Treasury to exercise fiscal prudence by tightening budgets temporarily.

Responding to Mr Mvimbi's question, Ms Matjeke confirmed the increase in the Western Cape budget from R73 billion to R74 billion, primarily to compensate for employee salaries. Regarding the unexpected increase in the wage bill, she acknowledged that ongoing wage negotiations at the time of the budget's tabling led to uncertainties, and the Minister could not confirm the final percentage increase. She expressed regret that the R1.7 billion increase was insufficient, leading to a need for the provincial government to find R1.4 billion within its budget. She clarified that efforts were ongoing to address inefficiencies in the wage bill while ensuring that critical sectors like health and education received the necessary increases.

Mr Kolisang Molukanele, Senior Economist, National Treasury, addressed the question about the declared underspending of R1.4 billion. He explained that the unallocated R1.4 billion was initially earmarked to accommodate a potential 20.7% increase in the National Energy Regulator of South Africa’s (NERSA) tariffs for municipalities. However, when the actual increase turned out to be 15.1%, the funds were deemed unnecessary, leading to the declaration of under-spending. The funds that were not utilised would return to the National Revenue Fund (NRF) for allocation through the budget process.

Responding to Mr Mvimbi's inquiry about the Neighbourhood Development Partnership Grant, Mr Molukanele clarified that the R88 million conversion from the direct branch to the indirect component of the grant did not affect the Western Cape. Instead, it primarily impacted Eastern Cape and Free State municipalities due to challenges in implementing certain projects.

Regarding Census 2022, Mr Molukanele acknowledged that the data's late release disrupted budget planning and that provinces had decided to wait for the complete dataset before incorporating it into the provincial equitable share and grants. He assured the Committee of ongoing engagement with Statistics South Africa (StatsSA) to expedite the process, acknowledging the frustration caused by budget cuts and migration patterns. However, he emphasised the need to maintain the integrity of the budget process and the incorporation of population data for the 2025 Medium Term Expenditure Framework (MTEF).

Further discussion
Ms Watambwa posed a follow-up question to Ms Matjeke, asking for clarification on which schools would be affected by the budget cuts in the educational infrastructure grant.

Ms Nomdo sought clarity on the R58 million related to the Early Childhood Development Grant (ECD) on page 33 of the Division of Revenue Act (DoRA). She referenced another R85 million for ECD on page 34 of DoRA. Expressing her confusion, she explained her intention to release a media statement after the meeting and emphasised the importance of accurately representing the information. She acknowledged the budget constraints and the need to prioritise, but she expressed dissatisfaction with what she perceived as incorrect decisions by the National Government. She stated her strong disapproval of the cuts in the social sector, particularly in relation to children's rights, and emphasised the negative impact she believed those decisions would have.

Ms Matjeke responded to suggestions from the National Government, stating that departments had to consider the stage of infrastructure projects when making budget cuts. She emphasised that cuts had to not affect ongoing projects nearing completion but rather target projects that had not yet started to minimise disruption. While she could not provide specific names of affected schools, she expressed willingness to inquire about that information from National Treasury's infrastructure unit.

Addressing Ms Nomdo's follow-up question about the Early Childhood Development (ECD) grant, Ms Matjeke clarified that the cuts also impacted infrastructure and maintenance, not the construction of ongoing projects. She assured the Committee that the subsidy component remained unaffected, particularly for school nutrition. Ms Matjeke acknowledged the economic challenges and the necessity of making cuts across different components under various grants.

The Chairperson sought clarity on whether the cuts implied a directive to halt new construction projects. Ms Matjeke confirmed that the message was to avoid starting new projects if there was uncertainty about sufficient funds, ensuring that ongoing projects continued.

Mr Mvimbi inquired about the Local Government equity shares and the issue of electricity, noting that the expected increase was 20.7%, but it turned out to be 15%. He suggested that the saved amount had to go back to the fiscus.

Mr Molukanele clarified that the provision for a 20.7% tariff increase was made, and if NERSA increased it beyond that, the R1.4 billion would have been allocated to municipalities. However, as NERSA reduced the increase to 15%, the R1.4 billion was not needed and was declared unallocated, reverting back to the National Revenue Fund.

The Chairperson summarised by asking if the simplification of the situation meant that National Treasury was essentially taking the money back.

Mr Molukanele affirmed that, explaining that if the funds were not used for their intended purpose, they were reverted back, following the general principle of conditional grants.

In conclusion, the Chairperson summarised the WCC inputs as:
-infrastructure grants must not be cut
-VAT not to be increased
-health, education and social grants not be cut, particularly in-year
-human rights experts to advise on budgets on conditional grants
-more friendly budget documents and child-friendly tools
-Treasury to not abandon children’s rights

She thanked everyone for their participation, noting it was a difficult given the current fiscal environment. She thanked Treasury for understanding the role Members played when they asked tough questions. If Members had further questions, it would be sent to Treasury.
The Committee would consider its negotiating mandate at the next meeting. Members were encouraged to send their input/recommendations before that meeting started, the next day.

The meeting was adjourned.