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FINANCE SELECT COMMITTEEFINANCE SELECT COMMITTEE 8 March 2006 DIVISION OF REVENUE BILL HEARINGS: PROVINCIAL AND LOCAL GOVERNMENT; WATER AFFAIRS AND FORESTRY; TREASURY; SPORTS AND RECREATION Chairperson: Mr T Ralane (ANC) Documents handed out: Department of Provincial and Local Government presentation (please email firstname.lastname@example.org) Department of Water Affairs and Forestry presentation National Treasury Proposed Amendments to the Division of Revenue Bill (see Appendix) Department of Sports and Recreation Comments on the Division of Revenue Bill SUMMARY The Departments of Provincial and Local Government and Water Affairs and Forestry met with the Committee to present opinions on the Division of Revenue Bill highlighting implications and concerns. Detail on national transfers was provided. The monitoring of expenditure at the local government level would be improved. The Departments advocated the amendment or removal of Section 16 of the Bill. National Treasury, the Development Bank of South Africa and the Financial and Fiscal Commission also presented related opinions. Members asked various questions including progress made to allow municipalities to deliver houses, the roll-out of free basic services to all poor areas, the achievement of development goals, the need for conditions to remain attached to financial transfers, proposals to replace Section 16 if removed, improvement of sanitation systems in the rural areas, whether a policy of closure of water provision existed and the need to maintain financial support for infrastructure projects. National Treasury outlined two amendments to the Division of Revenue Bill. The first dealt with what happened to money allocated to a municipality that no longer existed. The second dealt with the functions and role that a disestablished cross-boundary municipality had to fulfil until the next financial year. The Department of Agriculture and Land Affairs was due to make a presentation, but the Chairperson would not entertain the Department’s presentation until he had sent a letter to the Minister as the Committee had never received quarterly financial reports from her Department. The Department of Sports and Recreation had transferred R132 million to local authorities and built or upgraded 109 facilities. The project had since been transferred to the Municipal Infrastructure Grant of the Department of Provincial and Local Government. They noted that there had been a decline in the provision of sport-specific facilities under the Infrastructure Grant as this was not a priority for local authorities. The Community Mass Participation Programme Grant was introduced in the 2004/05 financial year with R9 million being allocated for all the provinces. Some of the achievements were that 92 637 people participated in the programme against an initial target of 27 000. Also, 707 administrators were trained against a target of 36. The latter grant had changed the way that Sport and Recreation South Africa had dealt with the provision of sport and recreation. The mass participation programme had become the flagship programme of the provincial departments, and through the conditional grant the Department had secured funds for provinces that they would never have received otherwise. MINUTES Department of Provincial and Local Government (DPLG) presentation Ms L Msengana-Ndlela (Director-General) outlined the information contained in the presentation. The Department provided an overview of the implications of the Division of Revenue Bill (DORA) to provincial and local government. Budget estimates were presented with reference to the three spheres of government. Detail was provided on national transfers to local government. Information on the Equitable Share and the Municipal Infrastructure Grant (MIG) was conveyed. MIG intended to provide all South Africans with a basic level of service delivery by the year 2013. R21.4 billion would be expended over the next three years. Funding would be made available in accordance with local development plans. Performance Management Systems would be implemented at the local government level. Financial management at provincial and local level would be strengthened. Ward committees would be supported to enhance functionality. Specific implications of the Bill were elucidated and concerns raised around Section 16. The section contradicted provisions of the current MIG policy framework. Section 16 undermined compliance with sector standards and norms with particular negative consequences for reporting requirements. Municipal governance, performance and accountability had to be improved in the short term. Mr L Fuzile (Chief Director-National Treasury) referred to various grants currently in operation such as the Financial Management Grant and the Neighbourhood Development Grant. The grants operated on a demand-driven basis from municipalities. The Restructuring Grant was directed at large municipalities with a minimum budget of R300 million. Restructuring of institutional and organisational matters would occur. Critical positions would be filled such as financial officers. Attention was focused on improving financial management such as billing systems, revenue collection and debt management. Credit control measures would have to be enhanced. Municipalities would have to produce Integrated Development Plans (IDPs) in order to access grants. Presently, ten municipalities have agreements with National Treasury. Progress would be evaluated in terms of set criteria. The Financial Management Grant sought to ensure the correct implementation of provisions of the Municipal Finance Management Act. Municipalities were encouraged to train individuals in finance-related issues to support skills development. Municipalities had to have appropriately-skilled personnel in management positions. The Neighbourhood Development Grant was designed to provide technical support to municipalities to upgrade infrastructure and community services. Municipalities would submit applications to access linked resources and develop social assets in densely-populated areas. Partnerships with the private sector would be encouraged to meet objectives. Initial financial transfer would focus on technical assistance with the larger amount destined for infrastructure development. The grant remained unallocated at this stage but would be forwarded on application. Ms L Dyasi (Development Bank of Southern Africa (DBSA)) stated that poorer municipalities were disadvantaged by the Equitable Share scheme due to their inability to raise sufficient levels of revenue. As a consequence, infrastructure backlogs worsened. An increase in infrastructure spending increased pressure on poorer municipalities to contribute to expenditure. The transparency of grants should not be compromised by unrealistic formula requirements. The quality of municipal expenditure had to improve. Mr M Tshangana (DBSA) declared that MIG was designed to supplement municipal budgets but in practice tended to serve as the entire budget in poorer municipalities. The administration of the MIG grant had to be carried out in an efficient way. A major challenge with the MIG formula was to identify the extent of public services in existence. Sector targets could not be achieved solely by MIG allocations. The Neighbourhood Grant would be restricted to technical assistance for municipalities. Public-private partnerships should be arranged to assist the process. The quality of spending of capacity-building grants had to be re-evaluated. Mr B Khumalo (Financial and Fiscal Commission (FFC)) stated that the FFC had made an input on the development component of the Division of Revenue Bill. The legislation stipulated that local government had to deal with developmental needs. The Commission considered steps that local government should take in addressing developmental needs. Horizontal allocations of resources would not allow developmental backlogs to be reduced. An evaluation of municipal services would be undertaken to determine a framework of services that municipalities should provide. Local government had to continue with the developmental component. Discussion The Chairperson declared that the implementation of the MIG had to be evaluated on a constant basis and the Committee would play its part in the evaluation process. Mr E Sogoni (ANC) asked for a progress report on the accreditation of municipalities to deliver houses and whether capacity shortfalls continued to hinder the process. Certain areas still had to receive free basic services. Mr Shiceka (ANC) declared that interaction was needed to identify key issues pertaining to development. Conditions had to be applied to Schedule four grants in order to ensure that Millennium Development Goal targets were achieved. The socio-economic context in South Africa demanded that conditions continued to be attached to developmental grants. Reporting methods had to be strengthened to facilitate monitoring. Ms M Montwedi (Chief Director-Municipal Infrastructure Grants) replied that the various grants were designed to address strategic issues and the purpose of the MIG was to fund infrastructure development for poor communities. A single monitoring system was in place to capture information and assess progress. The onus was on municipalities to accurately record how funds were utilised. Development initiatives had to adhere to set norms and standards such as environmental concerns. Integrated Development Plans were an important component of the process. Ms S Makotoko (Deputy Director General-Systems and Capacity-Building) stated that capacity-building grants should be issued in a manner that averted duplication. Municipalities should be allowed to fulfil the housing delivery function. Mr P Flusk (Deputy Director General-Free Basic Services and Infrastructure) stated that local government funding would be co-ordinated to achieve optimal results. Eskom signed service level agreements with municipalities to facilitate free basic electricity. Communities should be encouraged to acquire tokens for free electricity provision. Over 60% of municipalities had an indigent policy in place. R800 or less per month was regarded as an acceptable definition of indigency. The debate tended to be clouded by various income amounts in circulation. Sector departments would define norms and standards that governed development activities in their respective zones. Mr I Kganyago (National Treasury Director-General) declared that the MIG tended to crowd out equitable share transfers. The MIG was necessary as private sector lending to local government was unlikely outside of the six Metros. A common understanding of development was needed to co-ordinate all initiatives. The determination of the indigency definition was mired in controversy and was complicated by variable living costs in different areas and implications for the social wage. Mr Fuzile asserted that conditions did exist for the MIG and were outlined in the Bill. Sector departments possessed their own conditions for development initiatives. By-laws and other pieces of regulation also contained guidelines on conditionality. DPLG and National Treasury had to agree on the type of information required from municipalities to determine efficacy of expenditure. Allocations should be apportioned in a manner that attempted to rebalance service delivery. Ms Msengana-Ndlela stated that DPLG would take note of all inputs and comments made and incorporate them into planning. Co-operation between government departments was essential to achieve optimal results. A protocol should be devised with National Treasury to govern grant allocations. Resources had to be directed at poor areas to reduce inequalities and promote development. The three spheres of government should merge to drive the process. The monitoring of performance had to occur on a continuous basis. Mr Shiceka concurred that the quality of development was important and had to be evaluated on a regular basis. Deviations in delivery occurred that should be minimised. Poor standards of contracting contributed to underdevelopment. He asked what role ward committees could play in improving the process. The Chairperson asserted that departments that delivered services and engaged in development work had to adhere to set norms and standards. He suggested that DPLG provide quarterly performance reports to the Committee to assist in oversight responsibilities. Ms Mchunu referred to the removal of a poverty relief fund in the Eastern Cape and highlighted the adverse consequences for rural communities. Infant mortality rates remained high and served as a sound indicator of poverty levels. The Chairperson declared that the Committee would meet with National Treasury in due course to discuss grant allocations. Department of Water Affairs and Forestry (DWAF) presentation Mr T Balzer (Acting Chief Financial Officer) provided an overview of relevant grants and their areas of impact. Detail was provided on water services operational and transfer subsidies. Information was provided on Schedule 6 and 7 allocations with regard to the Division of Revenue Bill. The Department’s operating and maintenance expenditure over the past financial year was presented. The total projected value of the equitable share allocation was provided. DWAF outlined concerns related to the Division of Revenue Bill. Concerns were also raised around project registration and monitoring and reporting. The Department requested that Section 16 of the Bill be amended or removed from the legislation. Discussion Mr Botha asserted that the capacity of most municipalities to deliver services remained a problem. The monitoring system had to be improved to properly assess value of expenditure. He asked what the Department had in mind to replace Section 16 if removed. Mr Sogoni stated that the Department should put forward a clear proposal on its recommendations and opinions regarding Section 16 and forward it to the Committee. Rev P Moatshe (ANC) asked for further elaboration on the claims of incorrect allocations made by the Department. He asked whether staff transfers to municipalities were properly planned. An increase in fiscal allocations would be meaningless if management capability at the local government level could not be enhanced. Mr Botha noted that seven municipalities had not signed service level agreements and he asked whether an investigation had been conducted to ascertain the capacity of all local authorities particularly if more staff were to be assigned to them. Mr Shiceka asked whether the target to provide water to every household was likely to be met in the short term in accordance with stated Millennium Development goals. A desalination process could be an option to supplement water supply. Sanitation systems should be greatly improved in the rural areas to provide an adequate level of human dignity. A distinction had to be made between a water service provider and a water authority. Technical skills had to be provided at the local government level to advance delivery. Mr Sogoni stated that Sections 30 and 16 of the Bill tended to complement one another. He asked whether a policy of closure of water supply existed in the case of non-payment at the local government level. He asked why the Department did not forward quarterly reports to the Committee. Mr K Moekoena (ANC) asked what size budget was allocated for the various levels of forestry activity in order to promote sustainability. The secondment of staff seemed to assume a level of permanency in certain cases which was incorrect. Mr Botha added that irrigation schemes tended to be unsupported over time that negated the initial capital outlay. He referred to an increase of R20 million in expenditure by the Department in the last month of the financial year and asked for an explanation. Villagers in rural areas paying flat rates for water was a practice that should not continue. The Chairperson asked what conditions were laid down to govern the transfer of water schemes. Questions unrelated to the Division of Revenue Bill could be answered in writing in due course. Mr Balzer replied that many staff had been absorbed from the former homelands during water transfers. The secondment of some staff to municipalities had been carried out in consultation with trade unions. A functional assessment of schemes to be transferred had been undertaken. National Treasury supported initiatives to refurbish infrastructure in principle. Mr R Machaba (Manager-National Transfers) declared that some municipalities could not finalise transfer agreements for various reasons that would be discussed in a consultative manner. Mr H Muller (Chief Director-Water Services) stated that the issues around Section 16 would be clearly stated and forwarded to the Committee. He advised that municipalities link capital and operating maintenance expenditure. Sanitation standards had to be adhered to and additional funds were needed to give effect to plans. The distinction between water authority and water provider had to be maintained. Municipalities could not close off water supply for non-payment and a basic level of supply had to continue even if at the communal level. Communities had to be informed of any proposed alterations to water supply. Mr Balzer responded that a follow-up would be conducted on current information on flat rates and forwarded to Members. The increase in expenditure for March had been due to a training operation. No fiscal dumping would occur in terms of transfer agreements. Mr Brown (National Treasury) stated that Section 16 was intended to monitor project registration, budget and project approval. At no stage was the provision intended to undermine the autonomy of local government. The monitoring of grants had to occur in an effective manner. Legislation intended to reduce the burden of the administration of grants. The performance of municipal service delivery would be monitored by means of adequate reporting processes. Management capacity at the local government level had to be elevated. The meeting recessed for an hour for lunch. National Treasury Proposed Amendments to the Division of Revenue (DORA) Bill Mr L Fuzile from the Treasury said that there were two issues regarding cross-boundary municipalities. In one case, a municipality had ceased to exist during the financial year. Therefore money allocated to this municipality at the beginning of the year was in limbo "as it had nowhere to go". A clause had to be inserted into the Bill stating that money that had been due to that municipality had to be transferred to the municipality that absorbed that (disestablished) municipality. The second issue was that prior to the eradication of cross-border municipalities, parts of one municipality (such as Usumbubvu) were administered by another municipality, but the allocations of funds to that municipality were based on that municipality having a certain number of people in it, certain backlogs and so forth. The Bill lacked a clause that compelled that municipality (Usumbubvu) to use its fourth quarter funds on its people as if there had been no boundary changes. This was needed. Mr Fuzile added that the lesson they had learned from making these amendments, was that any changes (such as the eradication of cross-boundaries) that affected allocations had to occur at the beginning of, and not during a financial year. The changes outlined above had to include awareness that the powers and functions of the councillors and the municipalities concerned would be affected also. The Chairperson deferred any questions until the Members had had an opportunity to apply their minds to the amendments. Department of Agriculture and Land Affairs Presentation The Chairperson said that there was serious under-spending in the Provincial Departments of Agriculture. He had told the Minister of Agriculture and Land Affairs that the Committee had never received quarterly financial reports from her Department. She was shocked by this and immediately called the Director-General. The Chairperson would not entertain the Department’s presentation until he had sent a letter to the Minister. Department of Sports and Recreation Presentation Mr C Fredericks, the Chief Financial Officer, said that 2004/05 was the final year of the Building for Sport and Recreation Programme (BSRP). The Department had transferred R132 million to local authorities through DORA and built or upgraded 109 facilities. The project had since been transferred to the Municipal Infrastructure Grant (MIG) of the Department of Provincial and Local Government (DPLG). The Department had noted that in general there had been a decline in the provision of sport-specific facilities under the MIG as this was not a priority for local authorities. In spite of the prescribed role of Sports and Recreation South Africa (SRSA), the perception was that there was distance between the Department and the projects while provincial departments felt even further removed from the MIG process. SRSA saw ‘ring-fencing’ as being the only viable option for the provision of facilities. In 2003, SRSA alerted the National Treasury to the need for a Community Mass Participation Programme (CMMP) whose main aim was to reach those communities that were not normally serviced by national federations. Other objectives were to reach crime nodal areas and get people to become more active. The CMMP Grant was introduced in the 2004/05 financial year with R9 million being allocated for all the provinces. The Department gave each province R1 million under DORA and developed a Grant Framework for the programme. It also developed a blueprint for what became known as the Siyadlala Mass Participation Programme. Some of the achievements were that 92 637 people participated in the programme against an initial target of 27 000. Also, 707 administrators were trained against a target of 36. In terms of expenditure, only Gauteng and Mpumalanga failed to completely spend their allocation. In 2005/06, the grant was increased to R24 million with each province receiving R2.67 million which allowed an increase in the number of activities on offer. In this year, 1 399 023 people participated against an initial target of 500 000. The number of administrators trained was 894 against a target of 220. In 2005/06, all of the provinces were on track in terms of expenditure. The Department would receive R119 million in 2006/07, R154 million in 2007/08 and R205 million in 2008/09. For the 2006/07 year, expenditure of the R119 million was going to be split into two components: the Siyadlala Mass Participation Programme which was to receive R69 million, and the School Sport Mass Participation Programme which was to get R50 million. R39 million of the Siyadlala programme allocation would be divided equally among the provinces, with the remaining R30 million being disbursed according to the equitable share formula. The entire R50 million for the school sport programme would be allocated according to the equitable share formula. The DORA grant had changed the way that SRSA had dealt with the provision of sport and recreation. The CMMP had become the flagship programme of the provincial departments, and through the conditional grant the Department had secured funds for provinces that they would never have received otherwise. The programme had also created excitement about the Government’s delivery in the poorest areas. If the grant had to revert to the equitable share grant, sports programmes would be further marginalised than was presently the case. Discussion The Chairperson asked why even though each province had received R1 million in 2004/05, Gauteng grossly under-spent. Why did they decide to give each province the same amount even though the standard of facilities and infrastructure varied from province to province? He asked Mr Fuzile if the funding for sport facilities was included in the Provincial Infrastructure Grant that covered schools. Mr Fredericks explained that they had asked for Gauteng’s reasons for its under-spending in writing. The Department had in fact withheld their allocation for two months as they investigated. Gauteng did say that their low spending was due to a delay in procuring equipment for the various programmes. The province also felt that the CMMP was a national programme, when it fact the provinces had to direct it. This confusion was cleared up. Mr Fuzile admitted that the provision of sporting facilities had not been envisaged in the provincial allocations. However, there was a case for what the Minister of Education had said, in that there must be a standard model created for what constitutes a school, which must include sporting facilities. In that regard, the Sport and Recreation Department had to start lobbying the Education Department and the Treasury for funds for the sporting facilities. The meeting was adjourned. APPENDIX NATIONAL TREASURY PROPOSED AMENDMENTS TO DIVISION OF REVENUE BILL [B 3-2006] CLAUSE 15 1. On page 9, in line 46, to omit "subsection (1)(b)" and to substitute "subsection (1)". 2. On page 9, in line 48, to omit "Despite subsection (2)". 3. On page 9, in line 50, to omit "subsection (1)(b)" and to substitute "subsection (1)". CLAUSE 19 1. On page 11, in line 5, to omit "section 18(2)(a)" and to substitute "section 18(3)(a)". CLAUSE 25 1. On page 13, in line 26, to omit "subsections (1)(a), (b) or (c)" and to substitute "subsection (1)(a)". CLAUSE 38 1. On page 19, in line 31, to omit "a written agreement provided for in section 5 of that Act or another" and to substitute "an implementation protocol provided for in section 5 of that Act or any other". 2. On page 19, in line 45, to omit "The National Treasury may after" and to substitute "The National Treasury may, where a releasing province fails to comply with subsection (1)(a) or (c),after". CLAUSE 39 1. On page 20, in line 1, to omit the heading "Delayed implementation of changes to municipal or provincial boundaries" "and to substitute "Implementation of changes to municipal or provincial boundaries or powers and functions". 2. On page 20, in line 3, to omit "boundary of a province or municipality" and to substitute "boundary or the powers and functions of a province or municipality". CLAUSE 49 1. On page 22, in line 8, to omit "subsection (2)" and to substitute "subsections (2) and (3)". 2. On page 22, in line 12, to insert a new subsection (3): "(3) (a) A municipality affected by a demarcation referred to in the Cross-boundary Municipalities Laws Repeal and Related Matters Act, 2005 must, despite that demarcation and the repeal of the Division of Revenue Act, 2005, spend allocations made under the last named Act in accordance with that municipality’s budget for the 2005/06 municipal financial year in the geographical area that constituted that municipality immediately prior to that demarcation, until the commencement of the 2006/07 municipal financial year of the newly constituted municipality that is the successor-in-title of that municipality in terms of the first mentioned Act. (b) Despite subsection (a), all allocations payable to the Bohlabela District Municipality (CBDC4) in terms of the Division of Revenue Act, 2005, after 1 March 2006, must be transferred to the municipalities that are the successors-in-title of that municipality in terms of the Cross-boundary Municipalities Laws Repeal and Related Matters Act, 2005, in accordance with the same criteria and formulae that informed the allocations to the Bohlabela District Municipality. (c) The National Treasury must publish the allocations made to each successor-in-title municipality in accordance with paragraph (a), in the Gazette. " SCHEDULE 6 1. On page 43, in column 2, to omit "Local Government: Financial Management" and the substitute "Local Government Financial Management". 2. On page 43, in column 3, to omit "installlation" and to substitute "installation".