Division of Revenue Bill; Second Adjustments Appropriation (2023/24 FY) Bill & Gold and Foreign Exchange A/B: National Treasury briefing

Meeting report

National Treasury Briefing: 2024 Division of Revenue Bill [B4-2024]

The national share of revenue increases at an average annual rate of 2.6%. Transfers to provinces increase faster, at an average rate of 3.8% annually, with the equitable share growing more rapidly than conditional grants. This growth is primarily due to additional allocations to the equitable share, particularly for education and health. Transfers to local government also experience significant growth, increasing at an average annual rate of 5.2%.

Provincial Government Allocations

• In 2024/25, transfers to provinces constitute 97% of provincial revenue. The provincial equitable share grows at an average annual rate of 3.9%, slightly outpacing conditional grants which grow at 3.7%. Changes to provincial transfers involve a mix of reductions and increased allocations to the equitable share. These additional allocations are primarily aimed at addressing wage pressures, particularly in the fields of education and health.

Technical Updates to the Provincial Equitable Share Formula

• Data availability for components of the equitable share formula poses challenges.
• Some elements will be updated using data from the 2023 MTEF.
• Official mid-year population estimates for 2023 from Statistics South Africa (StatsSA) were not released at the time of formula determination. Instead, anticipated data from the 2022 Census was used, but most necessary census data was not yet available. Consequently, 2022 mid-year population estimates were utilised for updates in the current formula for the 2024 MTEF.
• Economic activity components rely on regional GDP data from the 2023 MTEF. However, Statistics South Africa is reviewing the methodology for determining regional GDP. The last official data available is from 2019, which informs updates to the equitable share formula over the 2024 MTEF period.

Local Government Allocations

Transfers to local government represent 9.8% of nationally raised revenue, with most local government revenue raised independently by municipalities. Direct allocations to local government increase by an average of 5.2% annually over the Medium-Term Expenditure Framework (MTEF). The local government equitable share experiences even higher growth, averaging 6.1% annually over the MTEF period.

Local Government Equitable Share

• Funding for all 257 municipalities is allocated through a formula to ensure fairness. The formula incorporates updated data including:
• A 10.8% increase for bulk water (averaging water board bulk price increases).
• A 12.7% increase for bulk electricity (averaging the Multi-Year Price Determination - 5).
• Projected Consumer Price Index (CPI) for other costs.
• The formula fully funds approximately 11.2 million poor households.

Substantive Changes to the Bill Clauses

The 2024 Bill largely maintains continuity with previous versions, but notable changes include:

Section 10:

• Addresses a problem by clarifying that transferring officers of Schedule 6 allocations are responsible for monitoring indirect grants, applicable to both municipal and provincial grants.
• Sub-clause (5) is revised to explicitly include Schedule 6 allocation, requiring monitoring of financial and non-financial performance.

Section 12:

• Addresses an issue by providing certainty of allocations to municipalities accredited to perform the Informal Settlements Upgrading Partnership (ISUP) and enabling better planning.
• Sub-section (6)(a) is updated to include planned expenditure for each year of the Medium-Term Expenditure Framework (MTEF) from ISUPG: Provinces for municipalities with level one or level two ISUP accreditation.
• Subsection 6(c) is updated to include amendments to ISUPG: Provinces allocations in the Gazette.

Section 14:

• Addresses ambiguity in compliance phrasing by clarifying measures and extent.
• Subsection(2)(b) is amended to require annual reports of national departments to indicate systems used to monitor compliance with the Act for allocations in Schedule 4, 5, or 7.

Section 16:

• Clarifies when shifts in expenditure come into effect, specifying the date of publication of the notice.
• Ensures that when a municipality is accredited to administer the Informal Settlements Upgrading Partnership (ISUP), funds flow accordingly, updating subsection 7(a) to include ISUPG: Provinces applicability.

Section 20:

• Addresses the need for provincial treasuries to monitor performance and assess feasibility by updating subsection (1) to include consultation with provincial treasuries when converting allocations.

Section 25:

• Clarifies the interpretation of funds transfer timelines for immediate response grants after a disaster, now starting a 100-day count from the day of disaster classification.
• Empowers the National Disaster Management Centre (NDMC) to specify expenditure timelines in approval letters to receiving officers, and revises subsection 3(d) to enable NDMC to stipulate a timeframe for Schedule 7 allocations expenditure.

Changes to the Schedule of the Bill

• Schedule 6, Part B is amended to introduce a new Smart Meters Grant aimed at financing the installation of bi-directional smart metering systems in municipalities.

See attached for full presentation

National Treasury Briefing: 2023/24 Second Adjustments Appropriation Bill [B6-2024]

Context

• The Minister of Finance presented the Second Adjustments Appropriation Bill during the 2024 National Budget presentation in Parliament on 21 February 2024. This Bill addresses additional adjustments needed beyond those made in the Appropriation Act of 2023.
• Section 213(2) of the Constitution specifies that money can only be withdrawn from the National Revenue Fund through an appropriation Act of Parliament or as a direct charge against the Fund, as outlined in the Constitution or an Act of Parliament.
• Section 12(1) and (2) of the Money Bills and Related Matters Act, 2009, mandates the tabling of a national adjustments budget, in line with section 30 of the Public Finance Management Act, 1999, with an adjustments appropriation Bill.
• Consequently, the National Assembly referred the Bill to the Committee of Appropriations for consideration and report.

Summary of the Second Adjustments Bill

• The Second Adjustment Bill involves a net movement of R290 million across functions, with the main source of funds being goods and services. Adjustments are made within functions, notably in the peace and security cluster and public service administration, utilising savings from community and economic development functions to accommodate 2023/24 wage agreement increases.
• Economically, R190 million is allocated to transfers and subsidies, R99 million for increases in compensation of employees, and R1 million for payment of capital assets, primarily sourced from goods and services.
• Allocations for the Department of Cooperative Governance are reduced by R400 million, mainly due to decreased allocations for the Community Work Programme resulting from delays in finalising contracts with new implementing agents.

Vote 1: Presidency

• The Second Adjustment Appropriation Bill allocates R70 million to the Presidency for establishing the Ministry of Electricity in the 2023/2024 financial year. This new ministry will oversee the response to the electricity crisis, with the appointed Minister assuming political responsibility and control over all critical aspects of the Energy Action Plan.
• The creation of this ministry aims to address the issue of fragmented responsibility across different departments and ministers. The Minister of Electricity will facilitate coordination among departments involved in the crisis response, collaborate with Eskom leadership to enhance power station performance and expedite the procurement of new generation capacity.

Vote 3: Cooperative Governance

• The Department of Cooperative Governance has experienced a downward adjustment of R400 million in its allocations. These reductions primarily affect the Community Work Programme due to delays in finalising contracts with new implementing agents.

Vote 5: Home Affairs

• The Department of Home Affairs has been allocated an additional R200 million, which has been reallocated to increase Political Party Funding allocations. The Electoral Commission has established the Party Funding Unit to enhance its capacity for implementing the Public Funding of Represented Political Parties Act. These funds, sourced annually from the National Revenue Fund, are distributed to political parties in the National Assembly or provincial legislatures. The Commission disburses the allocated amounts quarterly.

Vote 6: International Relations

• The Department of International Relations and Cooperation has received an extra allocation of R80 million for hosting the BRICS Summit in the 2023/24 fiscal year. Due to existing budget constraints and the depreciation of the Rand, the Department lacked the necessary funds to cover the costs of the Summit without this additional allocation.

Vote 12: Public Service Commission

• The Public Service Commission has been granted an additional R12 million to supplement its current allocations for the compensation of employees. This increase is necessary to address the higher-than-budgeted public service wage bill for the 2023/24 fiscal year and to cover funding for vacancies within the Commission.

Vote 13: Public Works and Infrastructure

• The allocations for Public Works and Infrastructure have been reduced by R70 million, with these savings being reallocated to the Presidency for the Ministry of Electricity and the e-Cabinet system.
• The underspending in Public Works and Infrastructure was identified across three programs: Administration, where there was an underspending of R12 million due to funded vacant posts. The Expanded Public Works Programme, with an underspend of R8 million. Property and Construction Industry Policy and Research, which saw an underspend of R35 million due to delays in appointing consultants for project preparation services by Infrastructure South Africa.

Vote 20: Women, Youth and Persons with Disabilities

• The Department of Women, Youth and Persons with Disabilities (DWYPD) received a R13 million increase in general administration and allocations to the Commission for Gender Equality (CGE).

Of this increase:

• R8 million was allocated to ease pressure on goods and services.
• R5 million is designated to enable the CGE to implement various projects, including research on thematic areas such as Gender-based Violence and Femicide, projects involving female Traditional Leaders, and other planned initiatives for the 2023/24 period.

Vote 25: Justice and Constitutional Development

• An allocation of R50 million has been designated to cover the increases in the 2023/24 public service wage agreement for the Justice for Court Services and National Prosecuting Authority.

Vote 27: Office of the Chief Justice

• The Office of the Chief Justice has been allocated R45 million to cover increases associated with the 2023/24 public service wage agreement. These adjustments specifically target Court Services and Judicial Education and Support.

See attached for full presentation

2024 Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7-2024]

What is GFECRA and how is it currently managed?

• The GFECRA is an account held at the South African Reserve Bank (SARB). Established by the SARB Act, it is designed to manage gains and losses on specific foreign currency transactions, safeguarding the SARB against currency fluctuations.
• Under the SARB Act, the Minister of Finance and the SARB Governor have the authority to settle balances through mutual agreement, with these balances required to be deposited into the NRF.
• The last balance settlement occurred in 2003, resulting in a R28 billion surplus for the SARB. Since then, the account's value has surged to over R500 billion, largely due to the substantial depreciation of the South African Rand.

What is the purpose of the 2024 GFECRA Defrayal Amendment Bill?

• The Amendment to the GFECRA Act allows for direct charges against the National Revenue Fund for the Contingency Reserve Account of the SARB. Additionally, it mandates the reporting of these funds, guided by a new Settlement Agreement between the Minister of Finance and the SARB Governor.

Why change the agreement?

• The SARB stands out among peer central banks due to its substantial GFECRA balance. This balance results in the SARB having the largest volume of liabilities to the government compared to any other central bank in the International Monetary Fund's International Financial Statistics database, relative to the size of its balance sheet. Additionally, the SARB has relatively low capital. Typically, unrealised valuation gains contribute to a central bank's equity, but in South Africa's case, these gains are accounted for within the GFECRA instead.

What is the new framework?

• Under the previous GFECRA settlement framework, most funds entering GFECRA remained unsettled, leading to steady growth in the account due to currency depreciation. However, the new framework adopts a different approach. GFECRA balances are now distributed into three "pools" in a waterfall arrangement.
• The first pool acts as a GFECRA buffer, designed to absorb significant and plausible rand appreciation shocks without resulting in negative balances. Once this buffer reaches its capacity, any additional funds flow into the second pool.
• The second pool serves as the SARB contingency reserve. It functions as an all-purpose equity buffer, intended to absorb losses, including those incurred from interest costs paid by the SARB to manage liquidity during GFECRA payouts to the NT.
• Any surplus funds remaining after the first two pools are full are distributed to National Treasury on an annual basis.

What are the key principles that govern the new framework?

The new framework for the Government Foreign Exchange Certificate Reserve Account (GFECRA) is guided by the following principles:

• The settlement of any GFECRA balance must not jeopardise the policy solvency of the South African Reserve Bank (SARB).
• Foreign exchange reserves will not be sold to realise GFECRA gains as long as reserves are below estimated adequacy levels.
• Unrealised balances on the GFECRA will not be settled if they could plausibly be reversed by future currency movements.
• Settlement of credit balances on the GFECRA to National Treasury should be utilised to reduce government borrowing.
• Any future settlement of GFECRA funds will be governed by an agreement and a relevant schedule.

What are the amounts going into each pool?

• The Government Foreign Exchange Certificate Reserve Account (GFECRA) buffer is set at R250 billion to minimise the risk of the account turning negative. This buffer aims to protect the National Treasury (NT) from needing to replenish the account to maintain a positive balance.
• The South African Reserve Bank (SARB) contingency reserve buffer will receive R100 billion to safeguard the SARB's policy solvency, ensuring flexibility in pursuing mandates without financial concerns. When available, this buffer will be replenished from excess GFECRA balances, aiming to sustain operations during periods without additional top-up funds.
• NT will receive R150 billion, paid out in three tranches over three years. These payments will incur liquidity management costs estimated at R8 billion in 2024, R10 billion in 2025, and R12 billion in 2026, depending on short-term interest rates, with recurring costs in subsequent years.

How is the GFECRA distribution to NT being used?

• Proceeds from the Government Foreign Exchange Certificate Reserve Account (GFECRA) will be utilised to decrease government borrowing. A total of R150 billion will be allocated to reduce government borrowing by R100 billion in the 2024/25 fiscal year, followed by reductions of R25 billion in both 2025/26 and 2026/27. This strategy will lead to a decrease in debt service costs by R30.2 billion over the medium term, accompanied by a reduction in the growth of the debt stock.

See attached for full presentation

Discussion
The Chairperson thanked National Treasury for its presentation and allowed the Committee to interact with the presentations.

Mr W Aucamp (DA, Northern Cape) thanked the Chairperson and National Treasury for the presentations. When listening to all the Committee meetings about the Budget and this Division of Revenue Bill, it was clear that the money was being taken from Paul to pay Peter. Money that should have gone towards service delivery was being taken and used in places with inefficient governance. With the trend of the money that went toward the public wage bill, it could be seen in the presentations that service to the people on the ground was being hampered because of a bloated and ineffective public wage sector. This took money that should have gone to the poor and was given to the public service sector. The people of South Africa did not get value from these services. The money and increase the public sector received would not lead to increased and improved service delivery. The Committee had to look at that.

With the Division of Revenue Bill, when looking at the first slide, the Committee was shown a pie chart and it could be seen that the local government received less money. It also stated that the Committee should consider that a massive portion of government money was generated by the various local governments. Has the ineffectiveness of local government to collect their revenue been taken into account when adjusting these amounts? It was one thing to say the Committee knew local governments received money, but the Committee knew they were ineffective in getting that money in. Big holes would be created by this. Merely saying they did collect their own money, but knowing they were unable to do that sufficiently would kick the can down the road and create more problems when it came to local government.

On the Municipal Infrastructure Grant (MIG), when the Auditor-General (AG) brought up the report of municipalities every year, there were still a large number of municipalities that used the MIG they received meant for certain projects for their monthly cash flow. They either paid wages or their electricity bills, because they did not do their debt collection properly. This happened a lot and was a problem for those municipalities because the people on the ground did not complete that project. Further, due to the MIG not being correctly spent, that municipality would be penalised in the future and would not receive an increased MIG for other projects. What consequence management will there be? The Committee saw MIGs spent ineffectively every year.

On the Second Adjustments Appropriation Bill, the presentation highlighted that the Presidency received R70 million for the Minister of Electricity. Such a minister would not be needed if cadre deployment and the wrong implementation of broad-based black economic empowerment(B-BBEE) did not happen in Eskom along with the corruption. There should have been no corruption in Eskom and the current electricity crisis would not have been. The Committee did not see consequence management for those responsible for that.

Next, he spoke about the R200 million for Home Affairs and the political party funding. The members knew that certain parties ran out of money and could not pay their own wage bills. Now, money that should have gone towards service delivery was now being used to fund political parties, or a specific political party that would receive the main portion, due to the ineffectiveness of its finance management. He thought this was shameful. Money was being taken from the people. Money meant for service delivery was paying for the ineffectiveness of a political party to run its finances properly.

There were annual ratings done by Standard and Poor’s, which stated that this transfer could jeopardise the Reserve Bank’s independence, and it was very sceptical about this. Fitch said the budget expectations were unrealistic. What are we going to do when these rating agencies, due to the Minister’s decisions, downgrade us again? Has that been taken into consideration with regard to what the effects of this would be?

Mr F Du Toit (FF+, North West) thanked the Chairperson and agreed with Mr Aucamp. What troubled him was the fact that R1.4 billion was shifted to the Municipal Disaster Recovery Grant for municipalities with flood damage. What about the damage that was caused because of the veld fires that were experienced in the North West and the Northern Cape? He wrote letters to both ministers and inquired about this. The response he received was that no assistance would be given. Funds were moved to assist with municipalities again after the municipalities did what was necessary. These funds could have been used to assist with food security and assist farmers who were victims of the veld fires get their crops. The Freedom Front Plus (FF+) did not support the fact that the Contingency Reserve was being plundered to take care of government’s debts.

Ms L Moss (ANC, Western Cape) greeted the Chairperson and everyone in the meeting. She agreed with Mr Aucuamp on the issue of the MIG funding. Last year, the National Council of Provinces (NCOP) held a House workshop where National Treasury identified that most of the municipalities did not use the MIG funding for infrastructure, especially in disadvantaged communities. When the Committee did its oversight and Taking Parliament To The People in September 2023, the Members of the Executive Council (MEC) of the Western Cape highlighted the issues of two municipalities in the province that did not spend the money as intended. The money was abused and corruption took place. Those things were happening. What is National Treasury doing with those municipalities that do not use the MIG funding as intended? There was no way that money was being used as intended.

On the issue of the Human Settlement Grant, the province received these funds and did not spend the grants. The President said in the State of the Nation Address (SONA) that National Treasury took this money back in the Western Cape because it did not spend the Human Settlement Grant, while people continued to live in backrooms with their families.

On the issue of the Educational Grant, the Committee said to do away with asbestos schools. In the Western Cape, there were a few asbestos schools. Even where she lived, there were six asbestos schools. She did oversight in the January 2024 back-to-school programme in Vredenberg. The school was incomplete and small enterprises were not paid and the project stood still for two years. She said the Panorama Primary School project should be investigated.

A secondary school was being built in her constituency, and the project was incomplete. The classrooms and bathrooms that were meant to be completed were vandalised. That school was also incomplete for two years. What can we do to fast-track this unnecessary loss of money from departments that are not completing the projects?

Mr Y Carrim (ANC, KZN) thanked the Chairperson. The Members agreed that education was in severe crisis. What was put in money-wise was not received in value. This had been raised to National Treasury repeatedly. It was not enough just to give money; it was also important to assist in the cooperation of the relevant departments, such as basic education, to ensure capacity, teachers, infrastructure, etc. He knew the questions the Committee asked National Treasury sometimes seemed unfair because National Treasury was not government as a whole. There were around 30 departments, and National Treasury had to work with them all at national and provincial levels. The Committee asked National Treasury questions with the understanding that it had to work with other relevant line function departments. Now and then, reports were seen by independent experts who pointed to the poor outcomes of the education system. This will not be done right as known. There was no future in this country for the poor and disadvantaged. We have raised these questions before, but can they remind us what is being done? What funds are allocated to deal with the broader issues of teacher capacity, infrastructure, etc? The MIG situation was terrible as previously highlighted by Members. It was not being spent on what it was meant for. The issue of capacity came up again, and the broader system of the local government financial system, which had been on the Committee’s agenda every year since 2019 and even before.

Regarding the reserves, the rating agencies could not be alienated. As important as they were, they were only one consideration. He did not read the same media that Mr Aucamp did, and perhaps he missed a lot of things that could have been valid. While political parties were up in arms and at least one of the rating agencies raised concerns, the technical experts on television commenting on the Budget did not seem to see it like that. Perhaps National Treasury could help the Committee; perhaps it was just him who caught people who did not see it as the end of the world. When he looked carefully, most people who were experts as well as rating agencies, did indeed see it as the end of the world, but he could not see that. It was not his area of expertise; he doubted any of the Committee Members fully understood the issues as they were too complex.

Can we not look into the veld fires? Can we explain why we treat veld fires so substantially differently from floods? The floods had devastating effects on a significant number of people, particularly those in the lower-lying areas and informal settlements, and this was understood. Veld fires were important. They also led to the destruction of people’s livelihoods, lives, and property and also affected the economy. Why are we so immune to veld fires?

The Chairperson thanked the Members for raising those important questions. She also wanted to raise a few questions, adding to what was already highlighted. She would try not to repeat what was said. She began with the presentation on the Division of Revenue Bill. The Committee needed to welcome the fact that itself and the Financial and Fiscal Commission (FFC) had been presenting to the House, and its recommendations were being considered according to the presentation. It remained a concern for the Committee when it did not see any consideration of its recommendations and those of the FFC and other constitutional institutions. This was an issue that was raised and now that the Committee saw that its concerns were given attention and the recommendations of those institutions were being considered and this was welcomed. The Committee had not seen how the recommendations of the budget forum were being considered according to the presentation and the amended budget. The South African Local Government Association (SALGA) repeatedly raised this as a concern when the Members met in the House, workshops, and engagements. It also raised this when it appeared before the Committee. It raised the issue of the Budget Forum recommendations not being considered. Perhaps if they were somehow taken into consideration and it was an oversight by the Committee, then the Committee should be assisted. The Committee thought these forums and recommendations, after long deliberations and engagements, should not be futile exercises. They should be taken seriously and put to use. How does the budget assist other spheres of government in strengthening their oversight function? She knew Mr Aucamp raised the issue of oversight and functioning of these other spheres of government while ensuring service delivery along with other Members. The Committee had to look into this, considering what Mr Carrim said, some things were implemented by sector departments. National Treasury needed to justify the decisions it took about reducing or increasing the budget or directing the budget to other departments. This was so that when the Bill was approved, there would be an understanding of why certain things happened. Since the beginning of this term’s engagements, the Committee had been raising the issue of the MIG funding and the conditional grant, which were not being used as intended in most cases. What are you doing as National Treasury? The Committee knew other provincial departments were doing oversight. Other role players did the same. Overall, the Committee could not say these people and departments were there but did not do anything. This budget should speak about these issues and concerns expressed by the Committee.

On the Second Adjustments Appropriation Bill, what is the service delivery impact of reducing the affected departments, particularly the Department of Public Works and Infrastructure? Given the much-needed infrastructure building and maintenance in the economy and job creation, she asked this. When the Committee dealt with infrastructure, it had to address it as government’s priorities. The Committee would be addressing several issues with the economy, job creation, and other issues that would make life easier or better for the disadvantaged. Businesses would also benefit from this.

How do we avoid the scenario where funds are moved from service delivery programmes to salaries? This should not sound like one was against the increment of salaries of public servants. If public servants were not well-paid and cared for, then it would be difficult to deal with the current corruption prevalent in departments. It was important to have this. She wanted National Treasury to clarify this.

Explain what you have called ‘savings’ under administrative function. The presentation had a section where National Treasury spoke about the savings of the budget under the administrative function. What do you mean by that? She asked National Treasury to give the Committee a breakdown so it could understand and be on the same page as National Treasury. How does this budget provide checks and balances to ensure that allocations are used for their intended purposes? She asked this question as a form of emphasis because other Members spoke about it. This was the Appropriations Committee, and even as it came from the National Assembly, it raised the fact that there should be value for money. The budget had to speak to the needs of the people and service delivery with Ms Moss’ example of what happened in her constituency. Those were educational issues. What is your role as National Treasury, having allocated the money and seeing no outcome from the allocations? The Committee wanted to see value for money and consequence management.

National Treasury Response

Ms Malijeng Ngqaleni, Head: Intergovernmental Relations, National Treasury, thanked the Chairperson and the Committee for the questions which were not easy to respond to because they reflected the issues that everyone wrestled with such as value for money. This was a massive issue that National Treasury wrestled with. She started with a few questions and would hand them over to the team to add. She started with Mr Aucamp’s concerns about stealing from Paul to pay Peter and the reallocation to the wage bill. National Treasury did reprioritisation from other programmes that were not performing and supported the pressures that emerged. This reflected the challenges National Treasury faced with reprioritising in terms of the trade-offs. This was particularly true given the constrained fiscal environment. Departments also could not continue to borrow just to pay for the wage bill and its impact. Part of what National Treasury wanted to achieve was fiscal consolidation. The reprioritising was done and part of the money increases in revenue partly supported the wage bill. This was important in terms of the impact of agreements in terms of functions like education and health and the security cluster. Members should also appreciate the importance of ensuring that those highly labour-intensive sectors were not hampered in terms of having to respond to the agreement in the wage bill. What would have been seen was money being pulled out of goods and services and infrastructure to pay for the wage bill if no support was received. With the support these departments were prioritised for, National Treasury could save on goods and services, and, to some extent, infrastructure. This was so it could still drive efficiency in these sectors. The overall response was the issue of reprioritisation. The Committee Members had to note that some of the cuts reflected the performance that was seen. This was also the case for infrastructure. Not much spending was seen which reflected that the cuts were problematic in terms of service delivery when looking at the spending in the current year. This was the case for both provincial and local governments. National Treasury still expected some understanding.

Regarding the impact of services, perhaps it was not that, but it was something National Treasury assessed. It looked at reforms for infrastructure. It hoped it could strengthen its incentives in its grants that would demand institutional reforms and performance. Currently, it felt the grants it gave to the local government for infrastructure did not have strong incentives. It explored starting with the metropolitan areas. This was what it spoke about; it was working on a reform programme. Treasury established incentives that it worked on with the Municipal Demarcation Board (MDB) to see if it could strengthen incentives to ensure the institutional performance it expected with how the services were managed and the skills, the investments in the bulk required and maintenance, and the collection of revenue. This should not be unsustainable. It could be seen that the revenue was declining. National Treasury was working on that programme. Having learned these lessons, perhaps it could help National Treasury work more broadly so it could consistently incentivise performance, which was something it had a problem with.

The second question was about the local government which was said to be inadequate. The Chairperson’s point about SALGA and the budget forum were related to this issue. She was unaware of recommendations that came from the budget forum that were not considered. Some were still in the process of being taken through. Some could reflect SALGA’s aspirations versus the budget forum, which was made up of SALGA, the budget council, and the MECs were also invited along with the Minister of Cooperative Governance and Traditional Affairs. She reflected on the issue of the split and the inadequacy that was reflected in the local government. The allocation for the local government came from the same pot allocated for provinces and national government functions. It was the same pot. There was no other pot it could draw from in terms of how much the national government borrowed and how much it collected in revenue. That pot would have to consider the powers, functions, and potential to raise revenue. When looking at how it was allocated to provinces, that had very limited revenue-raising powers, only around 3%. This was exploited to the maximum. Every year, the provinces looked at how they could improve their revenue from the 3% of power they had. The national functions did the same. This was the pot out of which National Treasury provided funding. She did not think anybody who said the local government was underfunded could also say what function in this pot was overfunded. If National Treasury had to increase for the local government without revenue growth, it could display where the revenue improved for the past 15 to 20 years. It was always biased towards the local government and would need to increase from 3% to 9%. What hindered National Treasury was its challenge with slow revenue growth. Even in that, it could be seen that the local government share was the strongest growing compared to other spheres of government. If it was said there was underfunding, the question would become, who is overfunded? Where National Treasury could take money without affecting other functions. There had to be an acceptance that there were fiscal constraints. No government functions could claim to be fully funded or overfunded, allowing National Treasury to shift the money. All functions of government could improve in terms of efficiency and effectiveness and this was the point raised by the Committee. The local government could do better in exploiting the revenue function powers it had. She did not think it should be said to consider its failure to collect revenue and make up for that. Even if local government allocations were doubled, with the current inefficiencies in revenue collection, it would be like pouring money into a leaking bucket. She thought the institutional challenges had to be corrected, particularly those that caused inefficiencies in the local government’s revenue collection. There was no way it could be said that even the metros could not collect revenue. It was an issue of how this capacity was exploited.

National Treasury also looked at how it enhanced municipality revenue sources. In terms of revenue, the revenue enhancement programme being run by National Treasury, was backed up by the debt relief programme linked to Eskom bailouts, allowed it to focus on the whole revenue management and value chain of revenue. Although the bailouts focused on electricity, the programme was designed to ensure that all aspects of failure to collect revenue in municipalities were being addressed. This was why National Treasury put forth, through reprioritisation, money for smart meters. This was a relatively small allocation, but it was also going to help National Treasury address the problem of non-payments and larger revenue issues. Everything needed to be done to ensure local government fully exploited its revenue powers. If it did not, then it meant somebody had to pay. It meant someone had to be taxed elsewhere to pay. Local government could not do this, given the fact that it could not tax to sufficiently provide the government enough to fulfil its commitments.

On the MIG that was still being used for other things, she already mentioned how money was being used and the impacts of the budget cuts. These did not translate to a reduction in services, given the inefficiencies in the system. There was an effort made here. National Treasury always looked at where the money was, and whether it was being spent accordingly. If no money was being spent in particular areas, then it was offset from the equitable share. National Treasury always thought this would be enough incentive for municipalities to do what they were meant to do correctly. Apart from this, the efforts that the Department of Cooperative Governance and Traditional Affairs (COGTA) implemented through the Municipal Infrastructure Support Agent (MISA) addressed the problem of understanding. This led to reallocation and loss of money by others; sometimes, money had to be redirected to the fiscus. COGTA could answer to this huge effort, which was also meant to address these problems.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, thanked the Chairperson. She indicated that the Division of Revenue National Treasury presented only accounted for the current revenue that municipalities collected. If municipalities optimised their revenue sources, National Treasury had programmes to assist municipalities with their revenue collection. This included the metros. Optimising revenue collection would see an increase in the percentage. The graph included the current inefficiencies in revenue collection. It was not based on if the municipalities collected revenue optimally, then that was what the division would be.

On the disasters, she indicated several areas could be classified as disasters, not just floods. Floods were probably the most frequent, followed by fires. Droughts happen the least but have the most severe impacts. All those were defined as disasters and could be classified as such. If a small disaster happened, it was seen as a localised disaster and could adequately be funded by the municipality or province concerned. If a disaster was too large for a municipality or province to deal with, then it was classified as a provincial disaster by the Disaster Management Centre. To access funds from the Disaster Management Centre, a disaster would have to be too large for the municipality or province to address with its funding. That was an important point. Funding that came from the fiscus for disasters targeted two areas. The first was public infrastructure damaged by disasters. If private infrastructure was damaged, private institutions were required to undertake the necessary insurance to fund the infrastructure. Such funding was available. Municipalities, particularly the larger ones, were required to take out infrastructure insurance. Second were indigent disasters. If these occurred, funding was made available from the fiscus. This was another important consideration. There were a range of funding instruments available to fund disasters and National Treasury was in the process of developing a paper that would deal with all the instruments available. As soon as this paper was available, it would share it with the Committee. It was a work in progress. It would indicate what tools and instruments were available to fund disasters. The private sector was required to take out insurance.

On grant funding, it was important for funding to be redirected as a first step. Secondly, National Treasury looked at existing underfunded conditional grants to reprioritise these to disasters. There were provisions in the Division of Revenue Act to allow for that. There was immediate disaster management money and then there were long-term rehabilitation funds funded through the normal budget process. These were complex issues and floods were not the only disasters being funded through the fiscus.

Ms Gcobisa Magazi, Director: Public Finance, National Treasury, said several of the public finance colleagues were on the call. On the Chairperson’s question and what National Treasury meant by administrative cost and functions, where the reductions were effected were mostly in goods and services. The impact would be on goods and services. Generally, it was for non-core goods and services. This was where items like travel subsistence would be looked at. In one instance of the Community Works Programme (CWP), this was money that sat under goods and services but was intended for the CWP.

Dr Rendani Mandela greeted the Committee. He dealt with Mr Aucamp and the Chairperson’s question about shifting funds from service delivery areas to compensate employees concerning the Second Adjustments Appropriation Bill. He spoke specifically about the CWP. Broadly, National Treasury shared the Committee’s concerns about shifting funds from non-delivery areas to consumption areas, such as compensation of employees. However, the reality with CWP was that this was the money National Treasury could say was declared for underspending in the current financial year. Going forward, the provision for the City of Ekurhuleni was not from the CWP. That provision was only for in-year because that money was not going to be spent in the current financial year. It was money already declared by the CWP, mainly because there were delays with signing contracts from service providers, and those contracts were then rendered irregular.

Regarding the impact on service delivery, when looking at the adjusted estimates in the publication produced during the Medium Term Budget Policy Statement (MTBPS), the target for the number of job opportunities was 250,000 for the year. Currently, this stands at 258,000. So this target was already surpassed despite the declared underspending of R400 million as a result of the delays in signing these contracts.

What are we doing forward? National Treasury engaged with the Department and was aligned with reconfiguring the programme going forward in terms of the targeted recipients, which the Director-General (DG) agreed with. Going forward, part of this has been redirected towards public employment initiatives. It would still be for the same purpose which was job creation, but under the public employment programme (PEP) and not CWP. This was just a portion of it which was R800 million, that was tabled in the February 2024 Budget.

What is being done to ensure funds are used for their intended purposes? One of the budgeting tools the National Treasury used was to earmark funds. Where powers could either be with National Treasury or Parliament in terms of the alternative proposals, it used those funds. Section 5 of the Appropriation Bill also gave parameters within which the shifting of funds could happen. In the main, the alternative use of funds could not be done in certain categories without Parliament’s or National Treasury’s approval.

Ms Gillian Wilson, Chief Director, National Treasury, thanked the Chairperson and the Committee. She responded to two areas raised by Mr Aucamp. The first one was about the R200 million allocated to Home Affairs as additional funding to the political parties’ representative fund. This was an in-year allocation and was an addition to the existing baseline inter-political party representative fund, which would assist political parties in dealing with additional costs for the upcoming national and provincial elections.

On the funding identified by the Department of Public Works and Infrastructure, most of the funding would come from project preparation. National Treasury ensured it would not impact service delivery. There was some underspending last year in project preparation. National Treasury wanted to ensure all the money from the baseline would be spent. There were delays in appointing service providers in some of the projects, but there was enough money in the baseline to deal with all existing infrastructure projects. The money identified would not impact service delivery.

Mr Spencer Janari, Education Budget and Policy Analyst, National Treasury, greeted the Committee. He responded to some of the questions about education. On the plans with the in-service training of teachers, there was meant to be an overall plan to improve serving teachers. Things were changing, not just the curriculum but the requirements of the world out there. Even if teachers were well qualified, they still had to keep up to date with the new requirements and changes as they occurred. Some teachers were not coping and needed support. There was meant to be a support programme for teachers. Like other professionals, teachers had to get a certain number of training points over a two-year cycle. The continuous professional development teacher system was administered by the South African Council on Educators. There were still issues around what constituted accredited programmes for Continuing Professional Teacher Development (CPTD), but there was certainly an overall programme in place for that, which was linked to the overall in-service training of teachers in general.

There was a question about the state of some schools and asbestos schools. There were two infrastructure grants dedicated to addressing infrastructure-related problems. This was whether they were related to asbestos schools, which were meant to be a priority of the sector, or any other unsafe school structures. This was the sector’s infrastructure priorities. This included the provision of safe and appropriate sanitation for children at schools and dealing with unsafe buildings in a variety of ways. On the vandalisation of schools, this was difficult to plan for. It was something that the sector and provinces had to address as it happened and implement measures to prevent it from happening in areas where there were flashpoints in the province. This was an ongoing problem, and the provincial education departments had to deal with it on an ongoing basis. It was difficult to plan because it was not known which schools would be vandalised and which should be prevented rather than being planned to be fixed afterwards. He checked if there were any other questions that he could have missed. He added that everyone was collectively concerned about the performance of the education sector and learners in general. National Treasury felt that the focus of addressing these concerns and challenges experienced across the sector was fixing things at the foundational level. This meant addressing some basic areas, like reading, teaching numeracy, and mathematics at the foundational levels. This also included investment in early childhood development. The benefits of investing a lot more effort and resources at those levels would pay off in the long term and would lead to an improved education sector as a whole. There was a concern about the overall performance of the education sector. Some of the metrics indicated that there were improvements, but they were too slow and too few. Some more pushing was required on many levels in this regard.

Ms Ngqaleni thanked her colleagues. Before handing over to the Chairperson, she commented on the questions asked about how the Budget addressed strengthening oversight of municipalities and provinces. The Budget still allocated a lot of money that was not significantly reduced to support capacity building. The capacity building and oversight issues were not because of a shortage of money. When looking at some of the conditional grants, there were also allocations meant to support capacity, such as the Municipal Systems Improvement Grant (MSIG) Cogta, National Treasury, Municipal Finance Improvement Programme (MFIP), etc. There were various grants for financial management. In each of the infrastructure grants, there was often an allowance for capacity building for national government and targeted spheres of government. How do we make capacity building effective and sustainable? This was the challenge so that capacity was not built today and gone tomorrow. That was part of the challenge National Treasury had with sustainability, which came from governance issues, which determined the kind of leadership and skills in the local government. It also determined the capacity to absorb what was provided. This was one of the issues that National treasury wrestled with. It did not have absolute answers for the Committee. It was a struggle at various levels and needed to be looked at to ensure value for money.

Further discussion
The Chairperson thanked National Treasury for its responses. She noticed that Members had follow-up questions. She told Mr Aucamp that if she allowed him to speak again, then everyone else would also want to speak. The Committee would then have to be given another slot to respond to the follow-ups. She did not think the time was in the Committee’s favour.

Mr Aucamp said he did not receive an answer to his question about GFECRA and the Standard and Poor’s and Fitch grading agencies and their commentary.

Ms Mmakgoshi Lekhethe, Head: Asset and Liability, National Treasury, said National Treasury saw the comments made by these rating agencies about the concerns around GFECRA jeopardising the Reserve Bank’s independence. National Treasury would be meeting with all the rating agencies in the next two weeks. It would take the rating agencies through the methodologies to display that what it was doing was not new. Other countries normalised these types of relationships with their central banks. National Treasury was normalising this. In 2003, the tables turned and the account was in the negatives, through an agreement with the central bank governor and the Minister of Finance that National Treasury pay money into the account. The funds were too high and out of the ordinary, which was why it advised the governor and the Minister to agree with a set amount of principles. At the top of that was the protection of the solvency of the Reserve Bank. The Committee would not undermine the Reserve Bank’s independence. This was written in the agreement that would be signed between the Minister of Finance and the governor of the central bank. National Treasury also met with market participants. This was what it did after every Budget. It had meetings with them and the banks. So far, it has received positive feedback on this because it has allowed National Treasury to reduce its options. Therefore, the crowding out effect the state had in the market through borrowing was reduced and space was made for corporates.

Mr Wessel Moolman, Director: Accounting and Information, National Treasury, greeted the Chairperson. He agreed and believed that the new settlement agreement protected the Reserve Bank and National Treasury in the way funds would be dispersed. This was not a weakening of the Reserve Bank’s independence. With its interactions with the rating agencies, it was important to note that all rating agencies had a standard item of concern regarding South Africa’s rising debt to gross domestic product (GDP) ratio. When looking at the new framework implemented for the Fiscal Framework and the use of GFECRA funds, this would be used to reduce the government’s requirements. This would then reduce the increase in debt and the debt service cost. Going forward, this should provide some fiscal space for the government.

When looking at the debt service cost over the medium term compared to National Treasury’s projections during the MTBPS, it would be around R30 billion lower compared to MTBPS in that period.

On the debt to GDP ratios, one should note that the number was revised downwards from 77.7% during the MTBPS to 75.3% of GDP. The ratio of debt service cost to revenue also stabilised in 2025/26. All those were positive to the opinions of the rating agencies.

Closing Remarks

The Chairperson thanked National Treasury for its responses. She hoped she was not misrepresenting the Committee by requesting that National Treasury send to the Committee the report on the Budget Forum recommendations once the processing was done. She requested this because this was always raised when the Committee met with the South African Local Government Association (SALGA). When this happens, the Members should know that National Treasury did its part. She suggested considering issues that other institutions or stakeholders raised. SALGA was one of the main stakeholders as a local government association. What was being raised was important. She asked National Treasury to submit the report by Friday and if this was not possible, she asked it to indicate when it could give the Committee that report.

National Treasury indicated that this was fine.

Committee Minutes dated 7 December 2023

The Chairperson took the Committee through the minutes. She asked Members to indicate if there was anything they wanted to speak about and asked for a mover for the adoption of the minutes.

Mr Carrim moved to adopt the minutes.

Ms M Mamaregane (ANC, Limpopo) seconded the adoption of the minutes.

Mr D Ryder (DA, Gauteng) asked about Mr Carrim moving for adoption when he was absent in the meeting.

Mr Carrim said he was in the meeting and his name was included in the attendance list.

The Chairperson said he was not well, but attended the meeting.

A staff member said Mr Carrim attended the meeting but was unable to participate.

The Chairperson thanked him and said Mr Ryder’s concern was addressed.

Committee minutes dated 22 February 2024

The Chairperson took the Committee through the minutes. She asked for a mover to adopt the minutes.

Ms Mamaregane moved to adopt the minutes.  

Mr Carrim seconded the adoption of the minutes.

Committee minutes dated 27 February 2024

The Chairperson took the Committee through the minutes. She asked for a mover to adopt the minutes.

Ms Moss moved to adopt the minutes.

Ms Mamaregane seconded the adoption of the minutes.

Meeting adjourned