Division of Revenue Bill: NT and NCOP Delegate briefing & public hearings

Meeting report

The Chairperson said the Committee would receive a briefing from the National Treasury (NT) and the Western Cape Provincial Treasury on the 2024/25 Division of Revenue Bill (DoRB). This would be the last DoRB for the Sixth Parliament.

Division of Revenue Bill: National Treasury presentation

The Committee was briefed by Mr Letsepa Pakkies, Director: Local Government Fiscal Framework; Mr Mandla Gobian, Senior Budget Analyst; Mr Misaveni Ngobeni, Chief Director: Urban Development and Infrastructure, Public Finance Division; and Ms Olorato Tlhoaele, Senior Economist: Intergovernmental Policy and Planning, National Treasury.

They said that the Bill had gone through all the relevant forums and that the division of revenue should be seen against the backdrop of a slow-growing economy facing severe challenges. This situation has impacted some decision-making processes on the DoRB.

Debt service costs were the highest-growing item in the bill. The government had to bring these costs down so that the country could address other pressing priorities more effectively, especially at the local government level.

The national share of revenue had increased at an annual rate of 2.6%, and transfers to provinces had increased at an average annual rate of 3.8%. The equitable share had grown faster than conditional grants. This was mainly due to additional allocations to the equitable share, specifically focusing on education and health.

Transfers to local government had grown at an average rate of 5.2%. The growth in local government transfers was the biggest, due to a growth of 6.1% in the equitable share. This has been done to deal with cost factors such as debt service costs.

NT had also instituted fiscal consolidation (austerity) measures, which impacted the reduced budgets.

National departments received 48.5%, provinces 41.7%, and local governments 9.7% of the revenue division. The DoRB was highly redistributive, and though the tax base was concentrated in urban areas, rural areas received the lion's share of allocations.

Transfers to provinces accounted for 97% of provincial revenue in 2024/25. The provincial equitable share had grown at an average annual growth rate of 3.9%. Changes to provincial transfers included reductions and additional allocations to the equitable share. Additional allocations were mainly to respond to wage pressures in the health and education sectors.

The total equitable share due to provinces stood at R600 billion, and conditional grants totalled R128 billion.

Of the above amounts, the Western Cape received a R62.071 billion equitable share allocation and R14.854 billion in conditional grants, bringing the total to R76.926 billion.

(See Presentation)

Discussion

Mr A van der Westhuizen (DA) noted the increased debt service costs and wanted to ascertain the main cost drivers.

Referring to the changes in the legislation (slide seven), specifically in relation to the allocation of the Human Settlements Development Grant (HSDG), he wanted to know how these changes would be communicated. He expressed his fear that promises would not be kept regarding housing.

He said he had a layman’s understanding of the difference between equitable share and conditional grants and that there were provinces with quite high conditional grant allocations compared to equitable share allocations. He asked that the NT explain the rationale behind its processes and how provinces could ensure that they received the maximum conditional grants.

He also wanted an explanation for the reference in slide 17 to “reductions on reductions”.

Slide 22 referred to the support provided to certain municipalities and stated that affluent municipalities would not receive additional support. This situation alarmed Mr Van der Westhuizen, who was concerned that incentives to perform had been taken away. He pointed out that affluent municipalities might be high-performing municipalities, but now they no longer receive grants.

He said that the public was suffering and that many people were not paying their utility bills. This trend continued to negatively impact Eskom, and the recent decision to discontinue E-tolls on the Gauteng Freeway Improvement Project (GFIP) now meant that both the Gauteng provincial government and the national government would have to shoulder the financial fallout.  

Mr Van der Westhuizen also recalled that the presentation had stated that municipal trading services had declined due to infrastructure and other challenges. Yet, bulk infrastructure allocations, as well as those earmarked for electrification, had seen a reduction. He found it ironic that the NT had noted local government's decline, yet had still seen it fit to reduce allocations meant to address these challenges.

He also touched on the motivation for the Municipal Recovery Infrastructure Grant (MRIG), and its relationship with natural disasters. He said a motivation for bulk infrastructure budget cuts should also have been provided.

Ms L Moss (ANC), a permanent delegate to the National Council of Provinces (NCOP), touched on electricity infrastructure. She wanted to ascertain who was responsible for street lighting and said that load-shedding had proved to be a disaster.

She said that the DoRB also made provision for free basic services to the indigent. Yet, in many cities and areas across the country, people found themselves without access to drinking water, which was a basic human right. She asked why money was still being earmarked for infrastructure development when most of it ended up being spent on other things such as salaries. She also wanted to know who was responsible for fixing potholes.

Ms Tlhoaele addressed the Section 12 amendments in slide seven of the presentation and said that the HSDG and the Informal Settlements Upgrading Partnership Grant (ISUPG) were normally transferred when provinces used Level 1 and 2 accredited municipalities to deliver on certain functions. These allocations were required by law to be published in the Government Gazette.

She explained that it was not an automatic exercise, where provinces decided they would not make certain allocations to municipalities. They would have to consider the municipality's performance. These allocations were required to be published so that municipalities had certainty that they would receive the funds. This mitigated the concerns raised by Mr Van der Westhuizen.

She said that conditional grants were administered by transferring officers within the different sectors. These transferring officers devised their own interventions for allocating funds and had the discretion and rationale to determine how they would address their objectives. Conditional grants were also sector—and programme-specific.

Mr Pakkies responded to the question about incentivising poor municipal governance and service delivery. They said that over the years NT had tried to institutionalise the use of incentives in the system. They also played a part in access to resources. The better they performed, the greater allocation they would receive. Sometimes one could apply and be eligible for most grants, but performance counts. Those provinces that performed well would also have access to that pot.

He said the growing debt services costs could be attributed to a combination of factors such as the global economic outlook, the exchange rate, low household consumption, and decreased exports. Load-shedding and inefficiencies at Transnet had not helped the situation either.

He commented that performance regarding conditional grant expenditure was not bad, but there was still room for improvement. The City of Cape Town had been a generous recipient of the Urban Settlements Development Grant (USDG) and had averaged a 65% expenditure rate. Municipalities had the option to use the USDG to address municipal trading service challenges. Still, many of them faced diverse constraints, and the reductions proposed had considered these constraints. Reductions were also shifted to other priority needs.

Mr Pakkies expressed pride in the electrification programme, as 95% of the access was universal. Smart meters not only helped with billing but also controlled losses. Funds were ploughed back into the system to address other electricity and water space challenges.

Mr Gobian responded to the question about how provinces could increase their conditional grant allocations and said that it was important for provinces to protect themselves from losing funds. In the past, the Western Cape had benefited from the reallocations from other provinces due to their good performance, and his message to the Western Cape was to continue to protect their conditional grants through their good performance base.

On the severity of the budget reductions over the medium-term expenditure period (MTEF) period, as set out on slide 17, he said the cuts would have a severe impact on service delivery in the provinces. These cuts would be more severe in the outer two years. Certain cushioning measures had been introduced, such as an additional R19.8 billion rand to the Western Cape’s equitable share to address wage concerns.

He explained the difference between equitable share and conditional grants, stating that conditional grants refer to specific purpose grants intended for specific projects, such as the Integrated National Electrification Grant. These grants could not be used for any other purpose than for what they were intended -- this was codified in South African law. Conversely, the equitable share was allocated through a formula, and there were not necessarily guidelines that said it should be bigger than conditional grants. Equitable share distribution depended on the needs of municipalities. Distributions fluctuated, based on project implementation. Those municipalities with the highest basic services backlogs received higher allocations than the more affluent municipalities. The bulk of the funding was allocated through the free basic services component, which, in the main, covered all poor households in the country.

Mr Gobian said the equitable share's institutional and community services component ensured equity at the municipal level so that all municipalities, from an administrative view, could deliver free basic services. It was not that affluent municipalities were neglected, as they had a revenue base from which to work.

Responding to Ms Moss, he said that municipalities were responsible for street lights and associated infrastructure and that maintenance and construction also depended on who was responsible for electricity provision within specific municipalities.

On allocations not being spent on priority areas, he said that municipalities had the flexibility to decide where to spend their equitable share. It was a matter of priorities and the issue of non-enforcement of debt policies. Naturally, this invariably led to municipalities' inability to respond to pressing issues.

The responsibility for fixing potholes was closely related to the powers and functions assigned to the respective government spheres. Whoever owned a road had the responsibility to maintain that infrastructure. The DoRB provided grants to all three spheres of government for road infrastructure development and maintenance.

Mr Van der Westhuizen thought it important to touch on electricity distribution, as it affected income. Vast areas were still being serviced by Eskom despite the utility not being directly politically accountable to voters.

He recalled that about 20 years ago, there had been discussions on creating regional electricity distributors. However, these discussions had never led to a meaningful change, as municipalities still performed this function. Boundary demarcations had a significant impact on the distribution and provision of electricity. He cited Pniel and Kylemore as two villages that fell within the boundaries of another municipality, yet they were situated within the Stellenbosch region.

He said that his question about the drivers of debt service costs had gone unanswered and that borrowing money to invest in long-term infrastructure projects such as dams and roads made more economic sense than spending it on salaries, etc. He asked to what extent they were living off borrowed money to pay for current expenses.

He said that the budget cycle and wage negotiations were out of sync and that negotiations should precede the budgeting planning process to absorb the outcome into the budget. He asserted that the government always “got caught with their pants down,” as wage negotiation outcomes were far higher than the government envisioned.

Alderman Paul Swart, Mayor of Bredasdorp and member of the South African Local Government Association (SALGA) Provincial Executive Council (PEC) said he was also interested in the drivers of increased debt service costs and that it took much more than money to address challenges on the ground. Political will also counted when it came to addressing these challenges.

He had not seen any allocations for capacity-building initiatives to provinces and municipalities, yet municipalities were buckling under capacity constraints. Since 1994, there had been this rallying cry of "A Better Tomorrow," which was still to be realised. Municipal constraints could be addressed only if there was investment since the situation was getting worse by the day.

The Chairperson also referred to the drivers of increased debt service costs and asked what NT had done to manage these costs, as South Africa could ill afford to sell off gold every year.

She also wanted to know when the updated census data would be factored into the budget, as a slide indicated that this had not yet been done. She asked National Treasury to provide a timeline to the Committee.

The Western Cape was the third-most populated province, yet it remained the sixth-biggest and fifth-smallest when it came to equitable share. She said that population figures played a big part in changing the equitable share formula.

During a previous meeting, she also recalled that NT had indicated to the Western Cape Standing Committee on Education that the Basic Education Laws Amendment (BELA) Bill had not been budgeted or included in the DoRB. She also pointed out that the BELA Bill was calculated on a ratio of one teacher to 40 learners. The norm was one teacher to 35 learners. Still, the average was 1 to 29 in the Western Cape, and the Bill had also not factored in funding for additional budget items like nutrition, transport and special education needs.

Given that National Treasury knew what the Department of Basic Education (DBE) would ask for if the Bill was passed, she asked if it added the Bill to the National Treasury fiscal risk register. The Western Cape had a fiscal risk register, which was an important tool since R17.7 billion was not just going to appear, and that was the underestimation, according to the Bill.

The Chairperson then referred to the amendment of Section 16 (2) (c). The amendment required National Treasury to publish all conditional grant funding shifts from one component to another in the Government Gazette. She asked National Treasury to explain this in detail to the Committee.

She also noted that most local government grants allocated to the Western Cape had seen expenditure of well over 80% to 90%. The USDG was one of three grants that had recorded expenditure below 70%.

She had just conferred with the City of Cape Town’s mayoral committee member responsible for finance, who had indicated that as at 15 April, the City had spent 60% of its annual allocation and 78% of its planned cash flow. On 13 March, the City asked the National Department of Human Settlements (DHS) to allow it to move funds from underperforming projects, but there has been no response to date. On 17 April, the City Manager wrote to the DHS once again and requested an update on the reconfigured budget that had been submitted. The City would like to shift funds from a stalled roads project to another project.

Ms Tlhoaele replied that Section 16 (2) (a) stated that a “framework may provide for components within a conditional grant to be shifted subject to specific conditions.” Certain provincial conditional grants provided for the shifting of funds from one component to another within the parameters of a specific grant. Section 16 thus made provision for transferring officers to shift allocations within the conditional grant. It also listed the necessary conditions or requirements before such a decision. The shift in the allocation came into effect when the Gazette was published.

Mr Gobian referred to aligning the budget process with wage negotiations. He said that NT was working on this alignment through its Public Sector Remuneration Unit, but nothing concrete had been agreed upon. The lack of multi-year agreements also posed a significant challenge.

He said during intergovernmental consultations, it had been agreed that the updated census data would be factored into the 2025 MTEF. At the moment, the information is not yet available.

He confirmed that the BELA Bill had not been provisioned for and that consultations between the DBE and NT would probably occur as soon as it was passed.

He asked that information on the fiscal risk register be provided later, as he did not have that information at hand.

Ms Tlhoaele added that through consultations with provinces, it had been agreed that the 2023 MTEF estimates would be used. A significant portion of the data required to effect updates to the methodologies that informed the equitable share formulas was not yet available. NT has since requested Statistics South Africa to have the data ready for the 2025 MTEF. Only 50% of the necessary data had been available. She added that population size was one of many factors that influenced a province’s equitable share.

On capacity building at the local government level, Mr Pakkies noted that according to a 2022 government study, R9 billion was spent annually on capacity-building initiatives. This was quite a large amount if one measured it against the dire straits experienced at the local government level. Poor governance and political instability were also factors that had to be considered.

He further explained that some municipalities would be earmarked for financial management grants, only to spend those funds on other budget lines. These situations were unlikely to yield results. It was important for municipalities to implement change management and theory of change policies.

Mr Pakkies added that he had expanded on the drivers of debt service costs earlier, but would repeat his comments. He said that drivers of debt service costs were myriad and included foreign exchange controls, rising borrowing costs, economic conditions, and such. He also said that current expenses would include expenditure on wages.

The government saw borrowing for investment in infrastructure as an important cog in economic development, as it created jobs and powered economic growth. The current Minister of Finance was a big proponent of this. He commented that government borrowing could be reduced if tax collection was improved.

He further stated that they would like to go back to the pre-2008/09 scenario, when they realised the primary budgetary surpluses were meaningfully present. This helped them decisively deal with the debt service costs, but they all had to protect social spending. The reconfiguration of the state to reduce some fat and inefficiencies and rationalising state institutions as well as the national Executive were some measures that could help the fiscus.

Mr Ngobeni spoke about the shifting of funds at the local government level. He said that this was not necessarily the shifting of funds between components, but rather adjustments to the implementation plans that the municipality had at the beginning of the year. It was important that solid motivations be provided, as the City of Cape Town had done with the request to national.

He added that the City of Cape Town had received additional funds towards the Informal Settlements Upgrading Grant (ISUG), which had necessitated adjustments to the implementation plan based on whether projects would be accelerated or new ones implemented.

The Chairperson said that the Committee would appreciate NT’s assistance regarding the City of Cape Town request. She also asked Mr Pakkies to check whether the BELA Bill had been factored into NT’s risk register.

She said she was a bit confused about the replies on the unavailability of the census data. She would have thought this would be easily available since the data was government-owned. She recalled that Ms Tlhoaele mentioned that NT planned to incorporate the census data in the 2025 MTEF cycle. She asked that timelines be provided.

On the various components that influenced the equitable share to the provinces, particularly health, she wanted to know what would happen when citizens with medical aid cover used public health facilities in areas where there were none. Many people on medical aid also had different options that sometimes required access to public health facilities. She used her constituency of Laingsburg as an example of where only public health care facilities existed. She wanted to know how public health facilities would be assisted when they also attended to citizens who had medical aid cover.

She added that NT had confirmed in a previous Budget Committee meeting that home-based care services were not included in the current formula and that there were talks of including provisions in other subsidies. She felt this was not a good thing, as those provinces that managed their healthcare systems well might lose out on additional funding.

Ms Tlhoaele clarified that her previous response was applicable to the current provincial equitable share and any future plans. Statistics South Africa had said that they preferred a phased approach to releasing the census data. The official release of the census data in October 2023 did not include the aggregated data that NT required to update components in the formula.

The health component had various sub-categories that must be aggregated and managed within stipulated conditions. NT sourced this data through the District Health Information System of the National Department of Health. If it happened that a person with medical aid cover accessed a public health facility in a district, that information would be picked up and factored in.

Members were also informed that different streams were used to access information on basic education. NT utilised both the population estimates and the enrolment at schools, which information was sourced from the DBE.

The Chairperson thanked the NT officials for their attendance and lauded their wonderful working relationship with the Committee.

The Western Cape had really tried to improve its budgetary processes, not only from a governance perspective but also from a parliamentary oversight perspective. The province had achieved much during the sixth term, and only the negotiating mandate and the final mandate stage remained.

On the negotiating mandate, the Chairperson said that Members would be given enough time to apply their minds and that a meeting had been convened for 8 a.m. on 22 April. Members were requested to provide their written responses by 7 a.m. on that day or alternatively present them orally during the meeting.

Committee matters

The Committee resolved to ask the NT whether the BELA Bill had been included in its risk register and to engage on the City of Cape Town’s behalf with the national Department of Human Settlements.

It also adopted a set of outstanding minutes dated 25 March. Mr K Brinkuis (Al Jama-ah) moved their adoption, and the Chairperson seconded.

The meeting was adjourned.