Review of the provincial equitable share formulae: FFC & National Treasury briefing

Meeting report

Chairperson's opening remarks

The Chairperson welcomed Members of the Committee, members of the press, National Treasury, and the Financial and Fiscal Commission (FFC). He noted the apologies of Ms H Neale-May (ANC) and Mr D van Rooyen (MK), who were both attending a Finance Portfolio Committee meeting. He requested that the agenda be adopted, given that no items were to be added, which was seconded by Dr M Burke (DA) and Mr W Douglas (MK).

The Chairperson said there would be a chairpersons committee meeting tomorrow in which the issue of parliamentary venues would be addressed. He was not pleased with having the meeting at the Fire and Ice Protea hotel – using outside venues caused an additional cost to the fiscus. It would be amiss of the Appropriations Committee to contribute to such expenses. In this case, the location of the meeting was a measure of last resort – requests for a virtual meeting were denied because Treasury and the FFC had already committed to travel to the venue.

He noted that there had been a budget council meeting with Treasury on Friday, looking at the projections from Q1 and Q2. He asked Members to use the constituency break to prepare themselves for a very busy time during Q3. He had requested a meeting with the Chairperson of the Committee on Education to discuss the budget cuts in education and other issues discussed within the Committee on Appropriations. He would give the Committee feedback in writing on the outcomes of this meeting.

The Chairperson noted that it was unacceptable for the presentations to have arrived late, particularly given that the invitations had been sent so far in advance. Both presentations were received very late. Overwhelming Members with information on the day or the day before the meeting would short-circuit accountability. The Committee tried to maintain a standard of delivering documents to Members at least three days ahead of time.

Mr Douglas agreed that Members needed enough time to read through the slides and prepare questions. He requested that more time be allowed in the meeting for each Member to ask as many questions after the presentations as required. He was willing to stay an extra two hours in a meeting if necessary.

Ms N Gcaleka-Mazibuko (ANC) thanked the Committee for its support during her family’s recent difficult times. She also emphasised the importance of receiving documentation on time, and noted that some Members were sitting on more than one committee. She requested that interrelated committees such as the Appropriations Committee, the Finance Committee, and the Committee on Public Accounts (SCOPA) not be scheduled for meetings at the same time. She and several other Members were currently missing another meeting.

The Chairperson assured the Committee that efforts were being made to synchronise interrelated committee meetings. He noted that a benefit of receiving documents ahead of time was that they could be integrated to avoid repetition and allow more time for the discussion.

Mr K Wakelin (DA) said that the Committee should not be shy about sending people away if they are unprepared or fail to give Members adequate time to prepare for meetings. He encouraged the Committee to have online meetings, when possible, to lower costs. He advocated using technology to avoid other costs such as printing.

The Chairperson highlighted that documents had not been printed for this meeting and would not be printed going forward, since all Members now had access to the necessary tools of trade. He invited the FFC to begin their presentation.

FFC briefing: Impact of Census on Equitable Share and Addressing Unfunded Mandates

Ms Sasha Peters, Programme Manager: National Appropriations, Financial and Fiscal Commission, reported on the Census 2011 and 2022 data.

Census 2022 showed a South African population of 62 million, with the Western Cape, Mpumalanga, and Gauteng having the fastest population growth (see slides). Regrettably, certain data sets, such as income, mortality, fertility, and employment had not been included in the release of census data.

Regarding the division of nationally raised revenue for the 2024 medium term expenditure framework (MTEF) period, the total share allocated to debt service costs had increased from 13% in 2020/21 to 17.9% in 2024/25. The percentage of nationally raised revenue to local government had remained relatively constant over the years, fluctuating between 8 – 10%. The total allocation to provincial government had increased nominally by an annual average of 3.8%, from R628.8 billion in 2020/21 to R729.5 billion in 2024/25, while the total allocation to local government had increased from R137.1 billion in 2020/21, to R170.3 billion in 2024/25. It was important to note that the division of revenue was presented at the level of the ‘Main Budget,’ and did not reflect the ‘own revenues’ raised by municipalities and provinces (see slides).

Mr Sabelo Mtantato, Senior Researcher: Division of Revenue, Provinces, FFC, explained the provincial government fiscal framework, and reported that the provincial equitable share (PES), consisting of unconditional transfers to provinces, made up 75% of provincial financing. By comparison, conditional grants/allocations in kind made up 20% of provincial financing, and only 5% came from provinces’ own revenue. The provincial equitable share formula consisted of an education component (48%), a health component (27%), a basic component (16%), a poverty component (3%), an economic component (3%) and an institutional component (5%). Any technical data updates, changes in data sources, and component updates had an impact on the PES and the funding allocated to provinces.

National Treasury decided to use Statistics South Africa’s (Stats SA's) mid-year population estimates to avoid the large fluctuations caused by the census updates every ten years and to ensure that the data used is the most up-to-date available. Although population estimates were a significant driver of the PES, a variety of other variables were being entered into the various sub-components of the formula. The PES formula was designed to be redistributive, with larger per capita allocations being made to poorer provinces and provinces with smaller populations. While most provinces experienced population growth, it was the relative growth to other provinces which was important.

Mr Mtantato illustrated the impact of census data and the 2024 mid-year population estimates on the basic component of the PES formula. The basic component was purely derived from each province’s share of the national population, and did not include any other variables. Using census data rather than 2024 mid-year population estimates would have an impact on this component of the PES for the 2025 MTEF. The changes most noticeable would be in Gauteng, which had been experiencing a decline in its relative share of the population, and KZN, which had been experiencing the largest relative increase in its population.

Ms Gianni Delle Donne, Researcher: Macroeconomics and Data Information, FFC, explained that the local government fiscal framework was based on the White Paper assumptions that indicated a 75%-25% split between own revenue and transfers. However, the assumptions of the White Paper were no longer valid, since municipalities were unable to achieve the revenue-raising capabilities envisioned. Services for poor households were mainly funded through transfers from the government, while services for non-poor households and businesses were paid for from municipalities’ own revenues. For the whole of local government, own revenues funded over 70% of budgets, but in rural areas with high poverty rates, transfers could fund up to 80% of budgets. The objectives of the local government equitable share (LGES) formula were to enable municipalities to provide basic services to poor households, and to enable municipalities with limited own resources to afford basic administrative and governance capacity and perform core municipal functions. The sub-components of the LGES formula were explained, and breakdowns of the allocations for different basic services and other components were given (see slides).

Ms Donne outlined the impact of using census data on the local government equitable share. The basic component and revenue adjustment factor of the LGES formula were data-dependent in terms of the total number of households and indigent households. For the LGES formula, indigent households were characterised as households whose income was below the amount of two state pensions. The data currently used was Census 2011, which was adjusted annually with the growth projections for each municipality based on the changes in the General Household Survey. In the Division of Revenue Bill, the National Treasury explained that the 2022 Census household data had shed light on the higher-than-expected growth in the number of households used in the local government equitable share formula for 2022/23, surpassing the current count of households by 1.1 million, which represented a difference of 6%. For the 2024/25 allocation, the number of households for the LGES formula was kept constant due to the significant differences between the projected number of households and Census 2022 results. This was to minimise the disruption to municipal allocations when the complete census data became available for implementation in the outer years of the MTEF period.

The revenue adjustment factor of the LGES formula was also affected by census data, since it was based on a per capita index using several variables from the 2011 Census. This included the total income of all individuals/households in a municipality, reported property values, number of households on traditional land, unemployment rate, and proportion of poor households as a percentage of the total number of households in the municipality. The top 10% of municipalities had a revenue adjustment factor of zero, which means that they did not receive an allocation from the institutional and community services components. The bottom 25% of municipalities had a revenue adjustment factor of 100%, while those falling between these two criteria had a revenue adjustment factor applied on a sliding scale.

Ms Peters reported on unfunded mandates, where no funding was provided despite the legal obligation to fulfil the function, as well as underfunded mandates, where funding was provided but did not cover the actual cost of providing the function. Unfunded mandates caused a disjuncture between policy objectives, plans, budgets, and implementation, resulting in a widening fiscal imbalance.

Having recently completed the review of the Health component, the current PES review was focused on the Education enrolment sub-component and aimed to account for the differentiation of learners according to poverty and the inclusion of learners in special needs schools as part of the school enrolment numbers. The current PES review process did not include a review of provincial unfunded/underfunded mandates, such as community safety and roads, for example. The current LGES formula did not address the issues of unfunded/underfunded mandates. In the current allocation via the formula, approximately 81% of the allocation was provided for the provision of free basic services to indigent households.

Ms Peters reported on the District Development Model (DDM), in which all three spheres of government were envisaged to coordinate and integrate development plans and budgets, and mobilise the capacity and resources of government to civil society. In its 2024/25 annual Division of Revenue submission, the Commission had recommended that the DDM be strengthened for better intergovernmental coordination. A collaborative, integrated approach with relevant national departments was needed to devise a funding model that enhanced local governments’ capacity to overcome the non-performance of conditional grant spending. The DDM also needed to follow a differentiated and targeted approach, since a uniform approach would not respond to municipal-specific needs.

(See attached for full presentation)

The Chairperson requested that National Treasury present before the discussion began, since the presentations dealt with similar content.

National Treasury briefing: Provincial and local government equitable share

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, said that Treasury would not repeat what had been said by the FFC. She noted that survey data could be used for the PES formula, but could not be used at a municipal level. The LGES was more reliant on Census data, which raised certain challenges.

Ms Olorato Tlhoaele, Senior Economist: Intergovernmental Policy and Planning, National Treasury, briefed the Committee on the principles that guided the PES formula and its review.

Allocations had to be based on the legitimate burden faced by each province in delivering their functions. A similar quality of services should be delivered to all South Africans, regardless of where they reside. Data that informed the formula should not be vulnerable to manipulation, and the formula should not reward policy choices of provinces one way or another. The formula needed the flexibility to respond to changes, enabling smooth updating of data and the ability to respond to policy adjustments. Provinces needed to be afforded a degree of certainty about their allocations over a three-year period to enable them to plan and budget effectively. The formula had to be designed for the long term, and be capable of ensuring equitable allocations even under difficult circumstances, without needing to amend the formula. The allocation formula had to be cognisant of the legally prescribed functional responsibilities of provinces. The formula should not reward inefficiencies in provinces, nor should it penalise efficiencies. The formula and information about how allocations were derived should be transparent and available to provinces and the public – this would make the allocations replicable by any interested parties. The formula needed to be consistent with policies set by national departments, not set new ones. Given the importance of quality data, data would be considered high quality only if it was official, frequent, reliable, valid and verifiable.

Ms Tlhoaele highlighted that the institutional and economic components did not rely on demographic data. The institutional component was divided equally amongst provinces, while the economic component was based on a share of each province’s gross domestic product (GDP). She said the PES formula was used as a tool to distribute funds allocated through the budget process. The formula did not determine the cost of services or mandates carried out by provinces and was merely used as a guide. Provinces were then responsible for determining the allocations for the different sectors.

She emphasised that the 2024 MTEF utilised 2022 mid-year population estimates data to update the PES formula due to the unavailability of Census data. In 2024, National Treasury had begun the process of liaising with StatsSA on the availability of the 2022 Census data for the purposes of the PES formula. Given that one of the principles underpinning the PES formula was to use the latest available data, the 2024 mid-year population estimates would be used to update all relevant components of the PES formula. Regional GDP numbers were expected to be released by Stats SA in September 2024, so the 2025 MTEF PES allocations per province would be released as part of the 2024 medium term budget policy statement (MTBPS).

Ms Tlhoaele updated the Committee on the background of the PES formula review. It had been under review since September 2015, and was carried out by representatives from National Treasury and the provincial treasuries. The purpose of the review was to assess the current data that informed the formula and the structure of each component. Notable changes have been made in the education and health components.

In the education component, major changes were made to improve the data in the enrolment subcomponent in 2018/19. Rather than collecting enrolment data through the School Reality Survey, the DBE had started using the Learner Unit Record Information and Tracking System (LURITS), which allowed data to be verified and learner’s progress to be tracked through their schooling careers. In 2019/20, it had been decided that the 2011 Census numbers used to capture the 5-17 age cohort be replaced with mid-year population estimates. Two reforms were proposed to the enrolment subcomponent – the inclusion of learners with special needs, and differentiation amongst learners according to their socio-economic background.

In the health component, a risk-adjusted index had been introduced in 2010. In the 2022 MTEF, the risk-adjusted index was redesigned to retain the previous variables and add three more. The variables now covered age and sex, total fertility rate, premature mortality, sparsity, and a multiple deprivation index.

Ms Zethu Ncube, Deputy Director: Intergovernmental Policy and Planning, National Treasury, highlighted that the LGES formula needed to be dynamic and able to respond to changes, only use high quality, verifiable, and credible data, and provide predictability and stability. She said municipal councils enjoyed discretion on how to spend the equitable share funds. The LGES formula was designed to fully fund the basic services component first. The policy norms for this component provided for 6kl of water per household per month, access to sanitation, 50kWh of electricity per household per month or free basic alternative energy (e.g., candles, gel) where electricity was not available, and basic refuse removal.

She noted that while municipal-level data was anticipated to be released later in the year, it would need to be received by October to allow for the necessary impact analysis. Should there be a delay in the release and analysis of data, the Treasury proposed that the formula be partially updated to account for the total number of households reported in the 2022 Census, but retain the poverty ratios from the 2011 Census. She outlined the options for phasing the 2022 Census data into the LGES formula, which included no phase-in, a three-year phase-in, or a five-year phase-in.

(See attached for full presentation)

Discussion

Dr Burke asked what the role of the last speaker for National Treasury was, and asked for confirmation that the most senior Treasury representative present was an acting Deputy Director-General (DDG). He asked that the Treasury start taking the Committee seriously, and not waste the time of ‘expensive’ Members of Parliament. He said the Members at the meeting today had been selected specifically based on their financial ability. He commented that the lack of any new insights in Treasury’s presentation was wasting the Committee’s time.

Dr Burke recalled communicating three months ago that there were serious concerns with the census data, and that the University of Cape Town's (UCT’s) actuarial department had labelled it a ‘work of fiction’. He expressed concern over this data still being used as input into the formula. Much time had been spent on understanding the composition of the formula, but by inputting unreliable data, the formula would automatically produce an unreliable output.

For example, the census data was predominantly used in the healthcare formula, from which the medically insured population was subtracted. However, the census data was known to be unreliable – it described a 48% growth in the population of Beaufort West, while satellite imagery showed that no population growth had taken place. On the other hand, the medically insured relation, which likely represented highly accurate data from the private sector, was subtracted. Because the medically insured figures were inflated in affluent and metropolitan areas, provinces with large urban and medically insured populations such as Gauteng, the Western Cape, and KZN would see a large subtraction, leaving the poorest people in those areas underserved. He said that this ‘junk-in, junk-out’ solution was preventing people in cities from accessing adequate medical care, and this was unacceptable.

Mr Wakelin recalled that after the Committee’s last meeting with the FFC, several written questions had been submitted to it. A written reply was received on 26 August, to which he planned to refer since the presentation did not reveal what the FFC had prioritised, who it had involved, or why it had not used its authority to ensure that the Committee could effectively conduct its work.

He expressed concern over the FFC being content with submitting recommendations without being further involved in the process. In the letter, he had asked a question about the 10% allocation to local government, which was based on the White Paper of 1998. What had the FFC done about this? What did the Committee need to do to change it? He said that the sense of frustration and irritability in the room was due to the FFC’s lack of urgency and accountability. Did the Committee need to send the Finance Department away and tell them to change their approach, or did it need to change legislation? The formal objection from the Western Cape against Limpopo over the evaluation of the population in those provinces had been treated as a non-issue. He asserted that it was an issue, and that other provinces were also likely to start disputes because of inaccurate results.

The FFC had stated that it advocated fundamentally reviewing local government transfers. Mr Wakelin asked where the Committee had been involved in this process to ensure that allocations happened appropriately. The FFC had also stated the need for a re-examination of the local White Paper, but had not involved the Committee in this. Who did the Committee need to engage? In the letter, the FFC had further recommended that the Ministers of the Department of Cooperative Governance and Traditional Affairs (CoGTA) and Finance should adopt a differentiated approach to review and fund local government to overcome municipalities’ unique challenges – this better represented the ‘marching orders’ that the Committee required from the FFC. He hoped for a sense of comfort that the FFC had done its absolute best to deal with these issues through the correct forums by the end of the meeting. To alleviate the debt burden, the FFC recommended structural reform and faster economic growth. However, their presentation had not shown how to foster economic growth.

Mr Wakelin asked the Chair to ensure that the recommendations received from the FFC be properly recorded so that the Committee could use them to inform its actions. The Committee needed to be prepared to challenge the FFC and the National Treasury if they could not do what was required of them.

He touched on the matter of indigent programmes. The DA's principal view was that it wanted to lift people out of poverty so that they could pay for their own services, rather than relying on social grants. His concern was that local governments did not have the capacity to ensure that the indigent programmes were implemented quantifiably and appropriately. Free basic services were distributed differently throughout the country. For example, the City of Tshwane allocated 100kW rather than 50kW per household per month. Did municipalities have leeway in these allocations, or should they follow what had been recommended? Further, many people benefitted from indigent programmes and did not deserve them – they drove large cars and lived in double-storey houses while collecting indigent programme money. How did National Treasury and Auditor-General (AG) ensure that the programme was quantifiable so that it was possible to see whether the funds arrived at the poorest of the poor?

Ms N Gcaleka-Mazibuko (ANC) recalled that her first interaction with National Treasury and the FFC had included an emphasis on the role of these two entities in economic growth. The situation in the country was dire, and so the assistance of these entities to government in promoting economic growth would be essential.

She was worried about the quality of the data used in determining equitable distribution, a concern raised in both presentations. The population has changed since 2022. For example, while there may have been several employed people per household in Soweto in 2022, this was no longer the case. She expressed confusion about the over/underestimation of population growth in metros, and questioned whether the data acknowledged daily migration in big cities. Gauteng province, in particular, acted as a gateway for migration. Basic services were not dependent on one’s place of origin, and were provided even to undocumented migrants – did the analysis take this, as well as the other realities happening on the ground, into account?

Ms Gcaleka-Mazibuko asked whether education was considered a free basic service, since some provinces had no free schools. Further, there were learners for whose education South Africa had partnered with other countries. For example, learners studying outside the country may still require a share of their costs to be paid by the South African government. She asked whether this category of learners had been taken into consideration in the equitable share formulae.

Mr M Lekganyane (ANC) requested that if the Committee required the most senior official of an organisation to present the briefing, it needed to make this clear. He said that since the Committee Members were operating from the highest locus of power in the country, they should embody the values that are cherished by society. He urged that the social justice principles of equity, redress, and equal access and opportunity for all be applied, even at the level of Committee meetings, and that respect be shown to all regardless of seniority.

He encouraged the FFC and National Treasury to advise the Committee if they had identified areas in the law that could be improved. This would enhance the work of both institutions, as well as the work of Parliament. He asked them to understand that the Committee was required to critique their approach, as well as the quality of the data itself. How and where had the formula worked? Where had it not worked? After thirty years of a democratic state, why were certain areas still underdeveloped? He suggested that areas could be categorised according to how well the formula had served them. Further, the FFC and National Treasury could communicate the wishes of local governments to the Committee directly, or else advise if this monitoring was the responsibility of a different entity so that the Committee could approach it.

Mr Lekganyane likened the formulae to square holes for round pegs. He said that even if the formulae were improved, they may still not work without monitoring the implementation of distribution. He noted the importance of the economic component, and asked how the economy of the country could be changed to benefit all South Africans. He asked to compare South Africa’s economic targets in the medium term -- for example, targets for 2050 or 2063 -- with the allocation for the economic component. If this allocation were increased, what were the issues that should be addressed?

He suggested monitoring how much of the allocations were used by provinces. He noted the barriers posed by unfunded and underfunded mandates, since they may comprise a main source of a province’s income. He also noted the presence of primary healthcare on the underfunded mandate list, despite its importance, and highlighted the need to look more deeply into the cases of learners with profound disabilities in the education sector.

Ms M Bartlett (ANC) encouraged attempts to save time by slightly shortening the time allocated for presentations in the future. She expressed deep concern over the data capturing used in the equitable share formulae, especially when it came to learners with special needs.

Mr Douglas said that the PES formula was fundamentally flawed. How did National Treasury justify the current PES formula when provinces like the Eastern Cape and North West were still under-resourced, despite being poorer than other provinces? The 2022 Census data indicated population discrepancies across provinces, yet the PES allocations remained rigid. Why had the Treasury not revised the PES formula to reflect the real demand for education and healthcare in poorer communities and provinces? How did Treasury plan to ensure that provinces with high youth unemployment, particularly in rural areas, received adequate resources to improve education access?

He said that the newly designed risk adjustment index did not consider the additional healthcare burden caused by poverty in rural areas. How did National Treasury address this, particularly in Limpopo and Mpumalanga? How did Treasury reconcile the continued unfunded mandates, especially in provinces with limited capacity, with the claim that the PES formula was designed to uplift underdeveloped areas? What measures would be taken to ensure that rural municipalities receive equitable funding for community services?

Mr Douglas said that the revenue adjustment factor seemed to disproportionately benefit urban municipalities. What plans were in place to ensure that poor rural municipalities received a fairer share of national revenue? The frequent reliance on outdated data from the census raised questions about the accuracy of the PES formula. Why had the National Treasury not adopted a real-time data collection mechanism to ensure that allocations always reflected current needs?

He noted that the proposed differentiation in learner categories was still under review. However, how did Treasury plan to expedite this process to ensure that learners with special needs and those from poorer backgrounds received equitable support? The LGES formula was also a point of worry. It appeared redistributive in theory, but provinces with high poverty rates continued to struggle in practice. How would Treasury reform this formula to ensure that areas with higher percentages of indigent households received a larger share? Currently, the budget and formula are not pro-poor. Why had the subsidy for free basic services not been adjusted to reflect the true cost of living and inflation over the past decade? Further, the overestimation of the LGES household numbers in provinces like Gauteng and KwaZulu-Natal raised concerns about resource misallocation. What was Treasury doing to correct this and ensure fairness in future allocations?

Mr Douglas noted that the delays in updating the data used in the LGES formula were exacerbating inequality in resource allocation. What emergency measures would Treasury take to ensure that underserved municipalities were not further disadvantaged? This was particularly relevant for the Eastern Cape and Limpopo, which faced ongoing pressures in education and healthcare. How did the Treasury plan to address these pressures in the context of a constrained fiscal environment?

Mr Douglas asked, given that the PES transfers were unconditional, how Treasury planned to ensure that provinces allocated resources efficiently to meet the needs of the poor and the marginalised, rather than focusing on politically motivated projects. The wealth of South Africa belonged to all its people – why did Treasury continue to perpetuate inequitable wealth distribution? Furthermore, the LGES formula failed to accommodate differences in provinces’ capacity. What reforms would be introduced to ensure municipalities with higher poverty rates and lower revenue potential received adequate resources? If provinces had a lower capability to produce their own revenue, they needed to receive more support. Conditional grants were meant to supplement PES transfers, but there were numerous reports of mismanagement of these funds. What measures would Treasury implement to ensure that these grants served their intended purpose? He said that Treasury had failed to serve the poor for the past thirty years, and that accountability was now crucial.

Ms N Hlonyana (EFF) spoke on the point of taking the Committee seriously, and warned that Parliament had sent officials away on numerous occasions in the past when their presentations and commitment had not been up to standard. She emphasised the need to have representatives of a range of seniority, so that the Committee’s questions could be addressed, particularly with the Committee’s meeting with Stats SA being the following day.

She noted that the FFC had allocated resources before the relevant data was available from Stats SA, as stated on slide 10. How much did KwaZulu-Natal (KZN) and Gauteng lose in revenue because of this? What did the FFC want the Committee to address with Stats SA the next day to prevent this?

Ms Hlonyana was concerned over provinces’ inability to raise their own funds. She asked how much was being spent on bank charges alone in moving funds from national to provincial level, and then again to local level. She said the EFF believed that the provincial sphere should not exist. What was the Treasury and the FFC’s advice on this idea? Would South Africa be able to operate at only national and local levels? How much money would be saved by doing so, and would it improve the speed of service delivery?

She referred to the amount of R567 being allocated per indigent household for basic services, which was to cover energy, water, sanitation and refuse removal. However, in districts like UThukela District in the Western Cape and Alfred Nzo District in the Eastern Cape, people collected their water from the rivers or natural springs. The sanitation systems in these areas, consisting of ‘long-drop,’ or ventilated improved pit (VIP) latrines, had not been serviced. There was no refuse removal taking place. Where did the money go if the allocated R567 did not go towards water, sanitation, or refuse removal? She said that without the issue of corruption being solved, the allocations would never reach the people they were supposed to, even if the formula was perfect. What was the FFC and Treasury’s solution to this?

The Chairperson noted that it had always been practice for any entity to send their most senior representative to present to Members of Parliament. He had himself insisted on the presence of Ministers at meetings with the Committee, leading to the Leader of Government Business cautioning him not to schedule those meetings on Wednesdays when Ministers may need to attend Cabinet meetings. He would communicate the Committee’s expectations to the Director-General of National Treasury, the Minister of Finance, and the Chairperson of the FFC.

Dr Burke apologised if his dissatisfaction with the above issue had been communicated in an ‘unkind’ way and said that he had been making the same point as the Chairperson.

The Chairperson asked what weight the level of economic activity in a municipality held in terms of the LGES formula. He noted that when there was a deprivation of economic activity in a municipality, its potential for revenue collection would be damaged. He said that net migration into cities was indicative of economic opportunities in these metros, and it was important to look at how economic activity could be raised other areas.

He raised the issue of disaster relief in the context of worsening climate change. Municipalities such as eThekwini and provinces like the Eastern Cape continued to suffer from severe flooding. The funds for disaster relief at the national level had been largely depleted after COVID-19, which would now lead to heavy borrowing. If this were not addressed, municipalities would need to compensate for infrastructural damage and manage disasters using the funds allocated for other services. He encouraged formulating pro-growth policies and initiatives to sustain welfare provision in the country, particularly in the context of South Africa’s high spending on debt.

Responses

Ms Peters (FFC) apologised if the FFC presentation had not covered certain aspects that Members were expecting. Some of these issues had been addressed in the written communications with the Committee, but she apologised for not weaving them into the presentation.

She clarified that the FFC’s core mandate was to make recommendations to Parliament, the nine provincial legislatures, and recognised local government. For example, the FFC could recommend that the assumptions of the White Paper were not realistic and needed to be re-examined, but the FFC could not initiate any legislative reform process – its recommendation was not binding. The FFC appreciated the guidance on the focus areas prioritised by the Committee, which it would take into consideration in their future work and research plans.

Mr Mtantato (FFC) acknowledged that the data being used in the formulae was unreliable and outdated. He suggested that it would be useful to hear Stats SA’s challenges in collecting the data since it should be one of the institutions feeding data to the FFC.

There have been various reviews of the PES formula by the FFC, and he suggested that the Committee invite the FFC to give a detailed presentation on how it has evolved over time. The FFC could only guide the distribution of resources by suggesting certain allocations to provinces – once the funding reached the province, it was not obliged to follow these recommendations exactly. Around two years ago, the FFC tried to investigate how far provinces deviated from the indicated allocations and found that a level of deviation did take place, particularly in Gauteng and the Western Cape.

Ms Donne said that the FFC did not support the heavy reliance on the intergovernmental fiscal transfer system, and believed that the White Paper did not adequately address the realities of municipalities. To provide further guidance on how to start implementing the recommendation of radically reconfiguring the local government fiscal framework, she encouraged the use of geospatial analysis, which would allow for a differentiated approach. The generalisation could be made that there was poverty, inequality, and unemployment in municipalities that were highly transfer dependent, but the underlying reasons for these factors could not be generalised. It was therefore essential to understand what was happening ‘on the ground’, which would also be useful in driving the local economic development necessary to enable municipalities to generate their own revenue.

Ms Donne said that the FFC had looked at the key components of total expenditure across local municipalities, and had found that although there was fruitless and wasteful expenditure, employment compensation had continued to increase on average, crowding out spending on bulk services such as water, sanitation, refuse and electricity. This situation tended to be more prominent in rural communities. For example, in Steve Tshwete Local Municipality in Mpumalanga, bulk service delivery accounted for 25% of total operational expenditure, while in Joe Morolong Local Municipality in the Northern Cape, this figure was only 5%. This was a big concern, especially considering Section 153 of the Constitution, which required municipalities to prioritise basic services. However, as indicated by National Treasury, there were no conditions attached to equitable shares and municipalities enjoyed discretion in allocating these funds.

Mr Mtantato reflected that the impact of budget cuts on education worsened issues of underfunded mandates, such as learner transport. Learners had been turning to unsafe and unlicensed modes of transport, resulting in numerous accidents, which would continue happening because of budget cuts. Another issue was that the learner-teacher ratio would increase as provinces received less funding for education.

Ms Fanoe said that no disrespect was meant by the National Treasury’s presentation that day, and that she would have presented if she had known about the Committee’s policy. It was her first time attending [a Committee meeting in] the seventh administration, and in the sixth administration the delegation to more junior officials had been accepted in this Committee. She hoped the Committee would accept the Treasury’s apology, and know that the mistake would not be repeated.

Ms Fanoe noted that the issue of the credibility of census data had been brought up numerous times. One of the principles underpinning both the PES formula and the LGES formula, which was agreed to by the provincial treasuries and politicians, was that official data needed to be used. This included data taken from Stats SA and data endorsed by the national department. For example, part of the PES data included the number of scholars indicated on the LURITS system, which was signed off by the heads of the provincial departments and verified by the national department. Treasury was working overtime on reforming the data, and the reforms would be introduced in 2026. The only reason for this delay was that Treasury was waiting for the income and expenditure survey data that would be released only in December 2024. She noted that universities did their own simulations and data collection, but often obtained different results even when experts conducted the research – this was why the National Treasury could not use unofficial sources of data.

She said that the Department of Cooperative Governance and Traditional Affairs (CoGTA) should be engaged on the topic of the local government White Paper. This Department had started the process of the review and would likely do this in collaboration with National Treasury and the FFC. The most contentious issue in the White Paper was the assumption of the ability of municipalities to collect their own revenue. National Treasury agreed this principle was overestimated and needed to be relooked at.

On the question of the relevance of provinces, she noted that provinces were nearly fully reliant on the fiscus, while local government was not. The two could therefore not be directly compared, and similarly, it could not be concluded that local governments were underfunded because they were receiving only 9%, or that provinces were overestimated because they were receiving 43%. Provinces had very little own revenue capabilities, primarily because they provided social services such as basic education and healthcare. There were 285 municipalities, and they varied to large extents – some could nearly fund themselves out of their own revenues, while others were nearly fully reliant on the fiscus.

The LGES formula considered the number of poor households entitled to free basic services. It also included the community service component and the institutional component, which went exclusively to the poorer municipalities. Metros would receive only the basic services component, while poorer municipalities would receive the basic services component in addition to the community service and institutional components. Rural municipalities would thus receive a much larger proportion of the LGES than metros in terms of per household per capita, although the metropolitan allocations may appear larger because of the sheer size of the population in these areas. She suggested that the White Paper should look at defining this proportion.

Ms Fanoe noted that only a third of the allocation for free basic services for municipalities was actually used for basic services. This value was known, because municipalities needed to indicate revenue forfeited in the budgeting system. She acknowledged that this had to be addressed. It was important to ask what rules and regulations could be put in place to make allocations unconditional.

She said Operation Vulindlela was helping to foster economic growth by building the capacities of municipalities to provide quality services and generate their own revenue. She noted that the national Department of Water and Sanitation (DWS) released information on the quality of water and sanitation provided per municipality, which was useful in determining the quality of service delivery. There were specific economically-targeted programmes for provinces such as the Special Economic Zones (SEZ) programmes run by the national Department of Trade, Industry and Competition (DTIC). Provinces could also support economic growth through their procurement strategies, having good quality roads, and focusing on agriculture.

Ms Fanoe said that the weighting of the economic component in the PES formula would be reviewed during the last phase of the review. The data and the structure of the formula needed to be corrected before the weightings could be checked for appropriateness. The economic component, looking at growth, had to be considered, together with the poverty component looking at deprivation. The balance between economic growth and social needs had to be maintained.

She explained that specific components within the PES were designed to benefit the smaller, more rural provinces such as the Northern Cape and North West. One component assisted poorer provinces in putting the basic administration in place to run their institutions.

A three-year phase-in of data was most often applied to ensure stability in allocations. If the difference in census data was very large, a longer phase-in of five years should be considered to allow the municipality time to adjust.

Follow-up discussion

The Chairperson contextualised the discussion about the formulae within the approaching appropriations phase. The Committee needed to understand where the issues in provinces’ expenditure lay. Certain joint projects needed to be undertaken by financial entities such as the Committee on Appropriations, the Committee on Finance, the FFC, and CoGTA. He suggested the possibility of a body independent of committees that would review the use of old data and legislative provisions so that outcomes could be improved.

Dr Burke elaborated on the point of seniority, saying that senior offcials were welcome to delegate to more junior representatives as long as they were present in the meeting. The underlying requirement was that the senior official  be present.

He was concerned about Treasury’s insistence on ‘official’ and ‘government-endorsed’ data. He said that this attitude seemed to be from a former era. It was negligent to act on data known to be unreliable, and this could not continue. It was imperative to investigate where accurate data that would inform policy decisions could be found. He emphasised that urbanisation was a positive trend for development. He cautioned against neglecting metros, which was perpetuated through using incorrect data. He accepted Treasury’s point on university data, but suggested approaching the private sector to find an alternative. The Committee could not endorse a budget that was based on a work of fiction.

The Chairperson said it would be useful to address these issues again the next day, when Stats SA would be in the room. He noted that inaccurate government data could be used for political manipulation.

Mr Wakelin emphasised that it was essential to use factual data. In terms of the White Paper issue, the Committee expected more from the FFC and would support it in telling government where it was failing. He said the question-and-answer document received on 26 August was a very good springboard for the Committee to use in approaching National Treasury and CoGTA. He said that the FFC needed to act as a mirror to show government where it was flawed.

He suggested forming a sub-committee to work on the White Paper and the matter of provincial allocations. This would drive the outcomes that the Committee needed, to avoid facing the same issue in a year’s time, bearing in mind that it had been a problem for the past thirty years. He emphasised the need to include CoGTA in this conversation, and highlighted that time was not on the Committee’s side – even the impact of decisions made this year would be visible only in three years’ time.

Ms Hlonyana said that it was no secret in the EFF that the Auditor-General was one of her favourites, because she would always present the facts. This was what was needed from the FFC. She encouraged the FFC not to hold back when telling the Committee what should be done. She asked what turnaround time for new data from Stats SA would be acceptable to the FFC, so that the Committee could communicate this to Stats SA the following day. Similarly, how did the FFC want the data to be structured?

She suggested that the revenue forfeited by municipalities should be used to build the infrastructure needed for better basic service delivery over time. She could not accept that the money allocated for basic services was used somewhere else. Her mother had collected water from the river, she had done the same, and her daughter would need to do so too, since nothing had changed in some municipalities. She asked the FFC and Treasury to tell the Committee what needed to be changed in the Constitution, the White Paper, the law, etc, so that the Committee could start the process of real change. She recalled her mother visiting a rural area when she was younger and returning impressed that it had flushing toilets and running water. This was approximately forty years ago, and she emphasised the need to make this a reality for those in her community within this lifetime.

Chairperson's closing remarks

The Chairperson requested that the minutes of the meeting be compiled to indicate an action plan for the work that needed to be done. The Money Bills Act empowered the Committee to make recommendations for amending the budget, but it had to operate using reliable data and consistent legislation. The Committee’s recommendations also had to take the current policy of the executive into account. He asked the Research Unit to get more detailed information from the Health and Education departments, considering some of the questions raised in the meeting.

He further requested that the minutes to be considered in the meeting, be tabled for tomorrow.

He thanked the Members and representatives of the FFC and National Treasury, and assured them that collaboration was their long-term objective.

The meeting was adjourned.