Division of Revenue Bill: Salga & PBO input

Meeting report

SALGA comments on the 2024 Division of Revenue Bill [B4-2024]

Mr Lesetja Dikgale, SALGA’s National Executive Committee (NEC) Member and Chairperson of the Municipal Finance Working Group, and Ms Lerato Phasha, Head: Municipal Finance, SALGA, made the presentation to the Committee.

The allocation to local government was R177 billion -- an increase of R4.9 billion from the previous year, but this still constituted a share of 9.7% from the fiscus. Organised local government still maintained that the local sphere of government was not adequately funded, as municipalities were able to cover only 60% of their expenditures from their own generated revenues. Municipalities were experiencing revenue challenges due to the high level of unemployment and poverty, resistance to payment for services, illegal connections, and theft.

SALGA said that it:

• Acknowledged government’s efforts to attain fiscal sustainability by narrowing the budget deficit and stabilising debt;
• Did not welcome the net decrease in the conditional grants' allocation of R384 million in the 2024 budget;
• Welcomed and appreciated the smart meter grant of R2 billion. The grant should be expanded to all municipalities, and end-to-end support should be provided;
• Welcomed all reforms to fast-track spending on infrastructure and the financing thereof; and
• Welcomed the review of the equitable share formula and the reforms to supplement the own revenue of municipalities.

See attached for full presentation

PBO's comments on the 2024 Division of Revenue Bill [B4-2024]

The presentation was given by Dr Dumisani Jantjies, Director of the PBO; Ms Kagiso Mamabolo, Economic Analyst; Dr Nelia Orlandi, Economic Analyst; Dr Mukundi Maphangwa, Public Finance Analyst, and Dr Seeraj Mohamed, Deputy Director: Economics.

The presentation included an assessment of the socio-economic and service delivery situation in the country, the 2024 Division of Revenue Bill, and provided additional information on the 2023/24 Second Adjustments Appropriations Bill.

The Division of Revenue Bill provided for the equitable division of nationally raised revenue between the national, provincial, and local spheres of government, which was estimated at approximately 48.5%, 41.7% and 9.7% respectively for 2024/25.

R150 billion had been injected into gold and foreign exchange contingency reserve account, and the PBO said the injection should not be earmarked solely for debt reduction, but should be strategically allocated to finance a targeted fiscal stimulus. The PBO was concerned that banks and financial institutions would be remunerated at the high policy interest rate, because the South African Reserve Bank (SARD) had decided not to sell foreign exchange reserves to finance the distribution to National Treasury, but was financing these funds with new SARB liabilities, mainly in the form of bank reserves.

See attached for full presentation

Discussion

Mr D Ryder (DA, Gauteng) asked SALGA about the legacy debt that was owed by the municipalities to ESKOM and the water boards. He said that the overwhelming debt in some municipalities undermines service delivery, because municipalities had to use free cash flows to pay for assets attached by the sheriff's office. What had SALGA done to deal with such issues? He said the Treasury had not received any suggestions or comments on matters affecting several municipalities. He was worried that many municipalities were losing the majority of the non-revenue water from the water boards, while it ran its water distribution business into a loss.

He said many district, metro and local municipalities procured electricity at a bulk rate from ESKOM, added on a margin, and then distributed the electricity to consumers. The margin allowed for the cost of the reticulation system, maintenance, improvement, and expansion to occur. During the past decade, the National Energy Regulator of SA (NERSA) granted ESKOM higher percentage increases than municipalities, squeezing the margin. Therefore, less money was available to invest in reticulation, with no money left to cross-subsidise other services.

He asked the PBO if they had done work on provincial salaries in the past year, such as the salary wage bill, and how much went to front-line service staff and back-office management, and its structures. He asked if there was any big announcement in the budget, as alluded to by the Minister of Health, on the funding of unemployed doctors. He asked the PBO how the e-toll’s legacy debt would be dealt with, and wanted to know if the 28% of the total government revenue generated for local government included billed revenue or actual collected revenue.

Mr F du Toit (FF+, North West) asked SALGA how it would intervene to aid struggling municipalities through capacity building programmes. What was its view on project mafias in various municipalities that prevented delivery of funded infrastructure products? He asked the PBO what specific steps should be taken to strengthen and improve local government supply chain management (SCM) systems, finance, and international controls to address corruption and financial wastage, particularly on conditional grant expenditure. Could the PBO advise the Committee on how the government could achieve value for money from additional resources earmarked for the safety and security sector?

Mr M Moletsane (EFF, Free State) wanted to know how SALGA was planning to assist struggling municipalities. What was it doing to improve their performances?

Mr Y Carrim (ANC, KZN) said the Committee had, in principle, supported SALGA’s claims for more funding for the past four to five years. SALGA presented the structural problems of the new finance model of local government. He stressed that the structural issues could not explain the local municipal crisis. Was SALGA doing enough to attend to what happens within municipalities – mismanagement, corruption, incompetence? He said that the National Council of Provinces (NCOP) and the Department of Cooperative Governance and Traditional Affairs (COGTA) had to agree that they had not done enough to get National Treasury to effect changes. Why did SALGA not agree that the mismanagement and other issues happening at the local level were because they were also complacent? He concluded that he was not pointing figures, because a failure in the local government reflected on the provincial and national government, but each party must be able to account for its responsibilities.

The Chairperson said that Members of this Committee had always been concerned about value for money and the capacity at the local government level, notwithstanding the provincial and national challenges. The provincial and national governments' work was mostly reflected in the local government. Because there had been no value for money, the Committee had made several recommendations for SALGA, COGTA and National Treasury on what needed to be done at the local government level. However, it could not help if the municipalities were underspending, redirecting, or misusing the conditional Municipal Infrastructure Grant (MIG). Since she joined the legislature in 2009, the MIG has always been a problem. Some municipalities took MIG funds to pay salaries for their employees.

She said that the Committee needed to take the informed recommendations to the Seventh Parliament as part of the Committee’s Legacy Report. She asked the PBO to advise government on how to achieve value for money. She concluded that at the State of the Nation Address (SONA), the President had spoken about prioritising public service at the local government level, and said there was a need to ensure that they put the citizens of South Africa at the forefront of their quest.

Responses

SALGA

Mr Dikgale said SALGA had been working with different security clusters to deal with the criminality of the construction mafia. He was happy that the Presidency had heeded their call by establishing a national intervention committee.

He agreed with the Committee that the matter of value for money had to be attended to. The Municipal Audit Support Programme (MASP) has assisted a lot of municipalities and ensured that treasury offices in municipalities were manned by accountants and professionals who understand the local government sphere and finances. The challenge at the rural municipalities was retaining the professionals, because they moved on to bigger municipalities, so smaller municipalities struggled to manage their finances through multi-year planning and budgeting, undermining their ability to spend the little funds they had. He added that the small municipalities lacked capacity due to internal challenges in areas such as human resources, systems, planning, and budgeting.

He said SALGA was focusing on weak municipalities to improve their value for money, acknowledging that one could not get value for money from an incapacitated institution. It had engaged National Treasury to not take money from these municipalities, but rather to deal with them using interventions that COGTA had deployed in the past.

SALGA was a receiving platform, and he had called on political parties in 2021 to check and ensure that the candidates on their list were the kind that would create an important foundation for proper leadership. It was about time that the political parties understood that the elected candidates had to have a historical understanding of the challenges, responsibility, and development of that particular local municipality. SALGA continuously engaged local municipalities on corruption and other issues to strengthen internal systems and facilitate transparent public participation, specifically in the supply chain process.

Mr Zamo Gwala, Acting Chief Officer: Municipal Finance, SALGA, said some problems experienced at the local municipalities were external, such as economic growth, the unemployment rate, and coalition government issues. Section 78 of the Constitution required a struggling municipality with a certain service to conduct an objective internal assessment of its own capacity. SALGA had initiated that process, and offered support services from SALGA, COGTA, the Department of Water and Sanitation (DWS) and National Treasury, to augment the capacity of the individual municipality. SALGA, the Development Bank of Southern Africa (DBSA) and the DWS had deployed a team of technical experts, including the private sector, to assist municipalities with detecting water leaks and dealing with non-revenue water. Ekurhuleni was one of the municipalities most affected by non-revenue water issues and had been looking at ways to deal with them. SALGA was drawing some lessons from this municipality.

He said that recording and taking a register of unemployed people in the municipalities was always a moving target. The register needed to be updated on a continuous basis.

Ms Phasha said municipalities did not conduct a cost of supply (COS) study to determine how much a service cost. The municipalities applied only normal increases that were suggested by a circular received from National Treasury. One issue affecting diminishing margins was consumers moving off-grid and looking for alternative energy sources. Generally, the newly off-grid ex-consumers were the higher consumers of electricity. SALGA assisted municipalities in conducting COS studies through a NERSA-accepted methodology. The municipality would utilise the methodology to conduct the needed determinations to check if the services were provided at a loss or gain, and how much margins were made. SALGA had helped municipalities under debt relief to check their ESKOM accounts to establish if the charges were the true reflection of what they were consuming. She said that SALGA would look into the municipalities with legacy debt from ESKOM and other water bodies. SALGA had a professionalisation programme aimed at assisting municipalities in professionalising.

PBO

Dr Jantjies said that the question about value for money was very important, and there was no shortcut to it. He recommended standardisation of the costs of service delivery and activities across government, but also to allow adjustments for regions. He advised the Committee to look into the nuts and bolts of standardisation because it ensured one would get value for money.

He said that the salaries of executives in the municipalities were excessive compared to other government entities. The professionalisation of the public sector and the standardisation of salaries across government entities would go a long way towards providing value for money. The other area that needed attention was related to the co-production of services, where a community created a value for money in local government which would enhance service delivery.

Ms Mamabolo said National Treasury had announced additional spending of R18.6 billion in this fiscal year, and a total of R57.6 billion over the medium-term expenditure framework (MTEF) period, to ensure that the salaries of teachers, nurses, doctors, and other public servants were paid. The money was also intended to address the recruitment of nurses and medical doctors. However, there were concerns about the erosion of this designated funding when considering the impact of inflation. She also flagged that the overall health function was under pressure when considering per capita expenditure figures, and an increase in additional resources for safety and security would make a difference. However, underlying issues need to be considered to deter the increase in crime.

Dr Orlandi said 62% of the total revenue was spent on provincial salaries for this year. The 22% and 5.5% were allocated for goods and services, and capital assets, respectively. The provincial level transfers about 5% to non-profit institutions to do some work for the provinces. She said it was the first time the Treasury had included the division of revenue on page 30. She had not done that calculation, but she would monitor it in the future. She could not confirm whether the revenue was billed, but promised to do the calculation and respond in writing.

She said the Auditor-General's reports were so detailed – according to their standards, every institution needed to comply with their action plan. The oversight institutions needed to focus on the action plans and their implementation for the local municipalities. Government was good at identifying shortcomings without addressing them.

Dr Mohamed said National Treasury and the Reserve Bank were establishing a system that could allay the fears of unintended consequences, ensuring there were enough gold and foreign exchange reserves to cover the possibility of unexpected events or shocks in the local and global financial markets. The Reserve Bank was not selling off the gold and foreign exchange reserves to pay the R250 billion – they would be increasing reserves on their own balance sheet. The PBO was concerned, because this created a very advantageous situation for local banks to increase their reserves under a safe investment, and under a certain repo rate. He said that R100 billion from the R250 billion was going to the Reserve Bank to set up this new system, and to cover the interest rate expenditure. The PBO was concerned that R150 billion was going to reduce government’s debt. He called on the Committee to put more thought into this new system.

Closure

The Chairperson asked the Members to continue engaging SALGA and the PBO if there were any concerns. She thanked everyone for the engagements, since it had been a very difficult financial year for the Committee.

She asked the Committee to adopt the minutes of the 20 March meeting.

Mr Carrim moved the adoption of the minutes, and Mr W Aucamp (DA, Northern Cape) seconded.

The meeting was adjourned.