Municipal Economic Review & Outlook (MERO); Division of Revenue Amendment Bill: Negotiating Mandate

Meeting report

The Chairperson asked Members to raise questions they might have about the MERO books provided by the Department prior to the presentation.

Ms C Murray (DA) inquired about the methodology used in collating information for the books. She was particularly interested in understanding how the absence of census data was managed during this process.

Ms N Nkondlo (ANC) expressed interest in understanding the methodology for the change in approach to the data presentation, specifically what had been changed from the previous editions where everything had been in one book to the current format of separate books for each district municipality. What were the cost implications of this exercise, questioning if having separate books for each district municipality is less costly than having one comprehensive book. She asked because of her interest in the efficiency and effectiveness of Provincial Treasury’s approach to data presentation and management. Have the changes improved the accessibility and usefulness of the information?

Provincial Minister of Finance and Economic Opportunities opening remarks
MEC Mireille Wenger explained that the presentation will address questions on methodology and the reason for having a book per region. They aim for cost-cutting, which is why there is a QR code in each book, making them fully digital and online, reducing the need for printing many copies.

The idea for having a book per region is to provide a specific focus on the same metrics within each of the district municipalities across the province. This allows for a comparison of ‘apples with apples’ within each district. The intention is for municipalities to use this information in their budget planning cycles. For example, someone from the Cape Winelands District would be able to see what is happening within their district and also within the municipal area in which they reside. The goal is for this to be used as a tool to inform budget and planning processes at the district level, focusing on spatial dimension and localized data.

2023/24 Municipal Economic Review and Outlook (MERO)
Ms Nadia Rinquest, Provincial Treasury Director: Government Budgets and Economic Intelligence, led the team in the presentation of the 2023/24 Municipal Economic Review and Outlook.

1. Population Increases and Housing Demand: The report highlights the impact of population growth on housing and demand for basic services.

2. Economic Recovery: Municipal economies have recovered from the COVID-19 impact, with a notable decrease in unemployment. The informal sector has been a major job growth contributor.

3. Challenges: Persistent low training levels in various sectors, slow recovery of tourism in 2022, and an overall increase in crime rates across municipalities.

4. Innovations in Data: The MERO introduces spatial tax data disaggregated down to the town level, offering insights into earnings and employment by town. New indicators include grant recipients, literacy levels, and Grade 3-6 and Grade 9 language and math pass rates.

5. Macroeconomic Performance: The global, national, and regional economies are interconnected. Challenges such as international conflicts, rising interest rates, and load shedding impact the Western Cape's economy.

6. Regional GDP and Employment Contribution: While the metro remains the largest contributor, other regions like Winelands, West Coast, and Garden Route are increasingly contributing to the Western Cape's economy, primarily due to growth in the agricultural sector.

7. GDP Growth: Top three municipalities with highest estimated growth in 2022 are Langeberg, Kannaland, George. The forecast for 2023 and 2024 indicates overall growth without contractions.

8. Economic Sectors: Sectors experiencing growth include transport, storage, communication, retail trade, and accommodation, while construction and agriculture show contractions.

9. Employment Situation: Although job recovery is underway, the Western Cape has not yet fully recovered from the job losses of 2020 and 2021. Some sectors, like construction, continue to experience declines.

10. Formal Employment and Exports: Sectors like tourism, real estate and business services contribute significantly to formal employment. Top export products include citrus, flat-rolled products and milk.

11. Tourism Performance: Bed nights show a recovery, but tourism spending as a proportion of GDP varies across districts, with a decrease in the Central Karoo.

[See document]

Discussion
Ms N Nkondlo (ANC) expressed her appreciation for the report, acknowledging its educational value and the effort put in by the Provincial Treasury. She emphasized the importance of understanding and utilizing the data, particularly in improving the status of portfolio. She suggested that Provincial Treasury should work on making the data more accessible and understandable to the public, possibly through the use of animation. This information is not only valuable for policymakers and decision-makers but also for ordinary citizens who play a part in shaping the province and South Africa.

Ms Nkondlo raised a question about the net job losses of 137 000, asking if the data could reveal which sectors were most affected and if the recovery was happening in the same sectors or different ones. She expressed interest in tracking the quarterly employment data to understand the contribution of the different sectors, especially considering that some sectors might not recover in the same way and new sectors might emerge. She would be interested in the General Household Survey data. Understanding these details can help in strategizing for the future.

Ms Nkondlo was also interested in understanding employment trends per household across different regions in each province. She questioned if such data could be extrapolated from the current data or if there was a specific source for such information. She emphasized the importance of this data in identifying pockets of extreme household poverty and food poverty. She noted the population growth, highlighting the challenges of people migrating into the province.

Ms Nkondlo asked about the responsiveness and agility of transport planning. She pointed to the transport burden on the roads and the impact on productivity for workers and industries. She asked about innovation in dealing with geographical spatial constraints and if there was a conversation about transport planning as part of the chief strategy. There needed to be agile transport planning authorization to avoid undue red tape and delays that could affect businesses.

Mr D America (DA) appreciated the preface to the input and found the report refreshing. He highlighted the concerning poverty rate of over 30%, with 35% in certain districts. He questioned the correlation between poverty rate and school retention rate within districts and asked about the social programmes to assist poor families and ensure that children stay in school for longer.

Mr America spoke to the need to explore self-financing infrastructure investments to stimulate growth in the province, considering the declining equitable share and conditional grants to municipalities. He suggested that the private sector should join hands with government and considered seeking foreign partners for financing infrastructure.

He acknowledged the structural fault lines in the economy that hinder economic development and asked about the ‘easy wins’ to mitigate these structural fault lines within the Western Cape. He specifically mentioned the issues with the ports and transportation infrastructure. He also raised concerns about the ongoing conflicts in Ukraine and the Middle East and their impact on the country and the Western Cape. He asked for Provincial Treasury’s view on these unresolved conflicts.

Mr America discussed migration to the Western Cape. There are two types of migration: high-worth individuals who contribute significantly to growth and job creation, and indigent people whose migration places a burden on infrastructure and service delivery, particularly in rural areas.

Given the population growth projections from the latest census, he questioned how the Western Cape plans to deal with potentially accelerated migration, especially considering that the province’s success might attract more people seeking opportunities. He emphasized the need for strategic planning to manage this potential influx and its impact on infrastructure and services.

Mr T Klaas (EFF) expressed interest in the population census asking if the population data includes both citizens and foreigners. He had observed a significant population of foreigners in certain towns and questioned why there is not separate information available for non-citizens. He questioned the methodology used to determine the food poverty line. He asked if the data was collected from house-to-house visits or another mechanism, particularly in informal settlements.

On policy planning and budgeting, he expressed concern about the focus on skills development and education. He questioned why skills obtained only through formal education, such as bachelor’s degrees, were considered, and why training and NQ levels were not included. He used his personal experience as an electrician trained by the Drakenstein municipality as an example.

Mr L Mvimbi (ANC) appreciated the MERO as a valuable tool for addressing economic challenges. He drew parallels between the MERO and the local economic development plans required by the Constitution for municipalities. He asked about the interaction between Provincial Treasury and the Department of Local Government in assisting municipalities to achieve their local economic development plan (LED). He questioned if the review was merely a desktop exercise or if it involved active engagement with municipalities and public participation. He emphasized the importance of sensitizing municipalities to the process and the resulting reports.

Mr Mvimbi asked about the key economic drivers in municipalities such as Langeberg, George, and Kannaland, which have been identified as experiencing economic growth. What drives economic growth in these areas, especially considering their small size? He raised concerns about the tourism industry, particularly in terms of short-term accommodation. He asked about the level of black economic empowerment in this industry and if there has been a shift in ownership towards previously disadvantaged individuals. Finally, he mentioned the opportunities in oil and gas in the Garden Route and asked if shale gas availability has also been identified as an opportunity especially in Beaufort West.

Ms C Murray (DA) expressed curiosity about the significant growth mentioned in the presentation for municipalities such as Beaufort West and Kannaland. She asked for more details about this growth and questioned if it could help improve the financial health of these municipalities, which are currently struggling.

Minister's Response
Ms Mireille Wenger, Provincial Minister of Finance and Economic Opportunities, expressed gratitude for the compliments on the report and appreciated the suggestion of using animation to make the information more accessible to the public. She explained that the MERO is intended to assist municipalities in their Integrated Development Planning (IDP) and budget planning processes. She mentioned plans to socialise the review as widely as possible and to use it in upcoming meetings with municipalities.

Ms Wenger acknowledged the importance of transport and mobility in relation to population growth and the need for public transport to connect people to opportunities, particularly in rapidly growing areas like George and Cape Town. The population data from the census includes both citizens and foreign nationals. On the correlation between the poverty rate and school retention rate, she highlighted the importance of school feeding schemes in ensuring children receive necessary nutrition.

On self-financing for infrastructure and the possibility of foreign partners, work is being done on blended financing. The Treasury team could provide more information on this and the model that is currently underway. Given the structural constraints of the economy, she suggested some potential short-term solutions such as increasing the efficiency of the port and reforming the visa regime. There was also the impact of geopolitical issues on the South African economy and, in turn, the Western Cape.

On public participation, much of the data comes from surveys of the public and tax data, and the MERO forms part of the budget process, which includes public participation.

Provincial Treasury response
Ms Shirley Robinson, Western Cape Treasury Chief Director: Public Policy Services, was excited about the Committee discussion, stating that it was very affirming to the team. The objective of the team was to draw out data and analytics that would answer fundamental questions on what they were addressing and if they had the right policy solutions. She encouraged Members to use the QR code to access the geographical tax database, a unique innovation in the South Africa data landscape. This database, which took 10 years to develop, provides data from company tax and anonymised IPR5s across wage brackets for the population in a municipality. The Western Cape and the City of Cape Town are the first to examine this data, which shows where jobs were created and lost at the municipal and town level.

South Africa is in a rapid urbanization phase, expected to continue until at least 2030 to 2040, with 80% of South Africans predicted to be living in urban areas. The Western Cape and Gauteng are the prime attractors. This urbanization is happening at both the high end and lower income level, generating both challenges and opportunities. She highlighted the potential benefits of urbanization when municipalities examine their information and forward-plan.

Ms Robinson said that its exploration of blended financing is a method that combines private sector financing, donor financing, development finance, and government financing to scale up infrastructure spend. The Department of Local Government (DLG) is doing work on the  Sustainable Development Infrastructure Financing Facility, particularly in the water and wastewater areas of growth for municipalities. There is an engagement with the World Bank to leverage donor financing and private sector financing for energy procurement, particularly from independent power producers.

Ms Robinson addressed the correlation of data sets, explaining that the data sets are drawn from Statistics South Africa survey data and modelled using Quantec as a data provider down to the local level. She clarified that while individual households are not tracked, trends can be observed by income level of households.

Ms Rinquest appreciated the questions, stating that they were the very questions the Western Cape government was trying to answer within the district books. She referred to the Central Karoo District Municipality (CKD) book, specifically page 39, which details the sectors that gained jobs and those that lost jobs within the CKD for the data period. She clarified that they do not correlate food poverty and employment levels, as these are two different data sets. The data for food poverty is sourced from Quantec, which uses Statistics SA data from surveys such as the General Household Survey to estimate poverty levels in the municipal area.

The survey Provincial Treasury does is conducted specifically for the municipalities, asking them several questions to correlate the data. This includes information about any big businesses that have closed down or opened up, new trends within the municipal area, and immigration trends. On skills development and training, the bachelor’s pass data is not university level data, but Matric outcome data from the Western Cape Education Department. While they do have data on skill levels in usability, they do not have it by NRF level.

The Provincial Treasury has close collaboration with sister departments, DLG and Department of Economic Development and Tourism. Provincial Treasury is responsible for supporting Local Economic Development plans and incorporating this data into their support for municipalities. Every municipality in the Western Cape, except possibly the City of Cape Town, uses their socioeconomic profile, which is data aggregated to a municipal level, which is reflected in all 29 IDPs in the Western Cape.

On the growth in smaller municipalities, she explained that those with a smaller base will show bigger initial growth than larger municipalities. However, this growth will eventually normalize. She gave the example of Prince Albert, which is very small and shows stronger growth due to its small base. While the CKD MERO does not specifically state that shale gas is an opportunity due to its environmental implications, it does mention it as an untapped resource in the CKD. The MERO also notes several opportunities for renewable energy in the CKD.

Finally, she encouraged Members to read the book, stating that it is a wealth of knowledge and makes for very interesting reading. She assured them that many of the questions raised would find their answers in the book.

Follow up Questions
The Chairperson expressed her interest in understanding the statistics in Laingsburg Local Municipality, her own constituency, particularly the severe malnutrition rate among children under five years old had increased from 1.5 in 2021 to 13.8 in 2022 per 1000 children in Laingsburg..

Ms Nkondlo expressed her concern about the time constraints, noting that they had only received the books the previous evening. She found it challenging to go through all of them. She would like to receive presentations on each Western Cape district municipality. If time allows, they could allocate 15 or 30 minutes for this purpose during the budget discussions for the week. She acknowledged the value of gaining insights and the importance of reading about the individual regions with Provincial Treasury.

The Chairperson suggested engaging the programming authority to find additional time in the programme to unpack some of the regional information. She noted that this was the first year they were conducting the presentation in the budget committee the day after the plenary sitting, providing Members with the opportunity to go through some of the documentation. She acknowledged the extensive reading required by Members, not only in their budget committee capacity but also in their constituency capacity.

The Chairperson was concerned about the increase in teenage pregnancy, malnutrition and indigent households in her constituency, as well as the limited job gains despite the introduction of wind farms.

The Chairperson expressed her gratitude to Team Finance for compiling the information, emphasizing that it provides evidence of the problem areas they need to focus on. She thanked them for their hard work.

Division of Revenue Amendment Bill: Western Cape Negotiating Mandate Report 
The Committee considered its Negotiating Mandate report on the Division of Revenue Amendment Bill.

The Committee acknowledged and appreciated the input of the Commissioner for Children during the public hearing on the Division of Revenue Amendment Bill. The Committee agreed that these comments are captured in the Committee negotiating mandate.

DA submission to the Committee on Division of Revenue Amendment Bill
Mr America expressed the DA's opposition to the Division of Revenue Amendment Bill for several reasons. The R1.7 billion increase in the Western Cape provincial equitable share allocation is insufficient to cover the cost of the centrally agreed public wage increase for the province’s government, which amounts to R2.9 billion. Service delivery is being crowded out by the public wage increase, forcing the provincial government to cut frontline services to cover the shortfall.

The cuts to conditional grants for provincial and local governments are excessive and damaging to the service delivery capabilities of these governments. He warned of the risk of overspending by provinces due to these cuts and the potential for provinces to be placed under administration by national government. The cuts to infrastructure grants, such as the Educational Infrastructure Grant, was particularly worrying. Infrastructure represents an investment in the future of the province and cuts to these grants risk halting projects midway.

It recommended that National Treasury not make any in-year budget cuts to conditional grants affecting infrastructure. He suggested sourcing funds from the national government budget instead of cutting local government and provincial government budgets.

There is no justification for cutting the budget for education, infrastructure, and early childhood development. This stance aligns with the public participation comments received by the Committee. Conditional grants have been in existence for years, and provinces and local governments depend on these grants when setting up their budgets and planning their programmes. It was recommended that these grants, particularly education, health and social security, should not be cut. Instead, they should be incorporated into the provincial equitable share formula.

The population data used to calculate the provincial equitable shares is outdated, as confirmed by the latest census. He recommended incorporating recent data and ongoing migration statistics into the main budget for implementation in February 2024. Capex favours rural provinces, but this does not differentiate between areas where poorer persons reside and areas which are considered rural in geographical terms. He recommended reviewing this metric to take into account where most poor persons reside in the province and in the Metro.

The DA expressed concern about the R1.4 billion cut in local government equitable share.It recommended reallocating these funds back to local governments in South Africa to relieve local municipalities of the impact of these budget cuts. The budget system should be made more child-friendly to understand and engage with, for example, through the use of more infographics, TikTok posts, and Instagram reels. It recommended that National Treasury includes experts in respective sectors to comment on the human rights and legal impact of cutting conditional grants. This aligns with the public participation comments received by the Committee.

National Treasury should not increase VAT further and should reduce the VAT burden on a range of food items to alleviate the impact of the increased cost of living on consumers. National Treasury was criticized for failing to manage the twin deficit - the budget deficit and the fiscal deficit - which are both at unsustainable levels within the Medium-Term Expenditure Framework. Borrowing does not flow to capital expenditure to create much-needed jobs in the economy, but is rather spent on current expenditure, which is unsustainable.

The DA expressed concern about the lack of fiscal decentralization where actual services are delivered. Provinces and municipalities had to find alternative funding to deal with the budget pressures caused by load shedding, which was due to national government’s inability to manage the energy crisis. The centralization of the wage agreement was also criticized as the Western Cape did not agree with the above-inflation rate agreement and should not be held accountable for decisions taken by national government within the Bargaining Council.

The Department of Public Service and Administration has not produced a plan to reduce the size of the public service, which is central to the fiscal crisis. Transnet was criticized for borrowing about R1 billion a day without any visible improvements. The Division of Revenue Amendment Bill does not create significant space for greater private sector involvement, despite public announcements by national government. Greater private sector involvement would reduce the fiscal pressures on the overall budget and should be encouraged.

It is thus impossible for the Democratic Alliance to support the Division of Revenue Amendment Bill 2023 in its current form.

Ms Murray provided comments and suggested changes to the report:

Page 1: She suggested changing the word “bias” to “favour” in the sentence about putting provinces under administration.

Page 2: She recommended including an introduction and overview of the bill, detailing any significant changes from previous budgets.

Page 3: She expressed the need for a more detailed breakdown of the allocations and justifications for various departments or initiatives, as well as comparisons with previous estimates.

Page 5: She suggested including a brief description of the impacts these allocations will have on respective municipalities, especially with regard to reductions.

Page 6: She questioned the uniformity in allocation to various municipalities and asked if they were based on population need or another metric.

Page 7: She expressed concern about the R1.4 billion cut in local government equitable share and recommended reallocating these funds back to local governments in South Africa.

Page 8: She suggested that the budget system should be made more child-friendly to understand and engage with such as through the use of more infographics, TikTok posts, and Instagram reels.

Page 9: She recommended that the National Treasury includes experts in respective sectors to comment on the human rights and legal impact of cutting respective conditional grants.

Page 10: She expressed her opposition to the Division of Revenue Amendment Bill and provided several reasons for her stance.

Page 11: She observed a consistent percentage decrease in infrastructure for various municipalities. She suggested asking for feedback and justification for these decreases and how they align with the strategic objectives for infrastructure within these municipalities.

Page 12: She noted a -6.7% decrease across various municipalities in the Municipal Infrastructure Grant. She recommended asking if these decreases will impact any critical infrastructure projects.

Page 13: She pointed out significant reductions in allocations under the Energy Efficiency and Demand Side Management Grant and the Integrated National Electrification Program. She suggested asking for information on how these cuts align with energy efficiency and electrification goals.

Page 14: She discussed the Rural Roads Asset Management Systems Grant and suggested focusing on the adequacy of these grants in maintaining and improving rural roads infrastructure, especially in light of any decreases.

Page 15: She highlighted the Regional Bulk Infrastructure Grants and Water Services Infrastructure Grants. Given the crucial nature of water infrastructure, she suggested getting feedback on the impact of any funding decreases on the delivery of water services and on regional bulk infrastructure.

Page 16: She looked at the Integrated Urban Development Grant and Informal Settlements Upgrading. She recommended focusing on if the allocations meet the growing needs for urban development and informal settlement upgrades, especially in the context of urbanization, housing demands, and immigration.

Page 21: She discussed the integration of conditional grants and suggested getting feedback on the importance of flexibility and targeted funding that conditional grants offer. She also emphasized the value of making financial information accessible to all ages and groups, including those who may be differently abled or have linguistic challenges.

Ms Murray highlighted the importance of using updated population data for budget considerations and suggested focusing on using current data to inform budget decisions and reflect changes in population distribution. She addressed underspending in local government equitable share and recommended understanding the reasons behind underspending before reallocation. She noted the recommendation to not increase VAT and reduce the VAT burden on food items in light of the impact on consumers and rising inflation. She suggested conducting a detailed analysis of the potential economic impact of such tax adjustments. Finally, she emphasized the call for human rights legal impact assessment of budget cuts and suggested the establishment of a formal process for such assessments to ensure that budget decisions uphold human rights standards.

Mr G Brinkhuis (Al Jama-ah) expressed his support for the Division of Revenue Bill. He referenced teachings from the Holy Quran, stating that if a person wants their blessings and provisions to be increased, they must show appreciation. He emphasized that the more appreciation a person shows for what they receive, the more blessings they will receive from God. Conversely, he warned that if a person receives their allotment and does not show appreciation, they should beware of severe punishment. He thanked the chairperson for the opportunity to express his views.

The Budget Committee voted on the Division of Revenue Amendment Bill [B33-2023] and the majority did not support the Bill.  The African National Congress and Al Jama-ah expressed its minority view to support the Bill.

The Western Cape Negotiating Mandate Report  was adopted.

The 23 November 2023 minutes were also adopted and the meeting adjourned.