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FINANCE SELECT COMMITTEE 07 March 2006 DIVISION OF REVENUE BILL HEARINGS 2006/07: MINERALS AND ENERGY, HOUSING, TRANSPORT, PUBLIC WORKS AND DBSA Chairperson: Mr T Ralane (ANC) (Free State) Document handed out: PowerPoint presentation by the Department of Housing on the Division of Revenue Bill PowerPoint presentation by the Department of Transport on the Division of Revenue Bill PowerPoint presentation by the Department of Public Works on the Division of Revenue Bill Department of Minerals and Energy Comments on the Division of Revenue Bill DBSA Commentary on the Division of Revenue Bill (DORA) SUMMARY The Committee was briefed by the Departments of Housing, Transport and Public Works on the Division of Revenue Bill. The Departments focussed on the grants that they administered, challenges they were facing and mechanisms to address them. The Department of Housing would administer only one conditional grant in the 2006/07 financial year: Integrated Housing and Human Settlement Development Grant. The Department had developed a specific and targeted framework to monitor the grant. The Integrated Housing and Human Settlement Developed grant would continue for the 2006/07 financial year under the current mechanisms/framework in order allow the Minister of Housing to fulfil her functions adequately. The Department's allocation would be utilized to fund the approved national programmes with emphasis on the national priorities such as the informal settlement upgrading (eradication by 2014/15); urban and rural development works and job creation. Under the Department of Transport, Cabinet had endorsed the Gautrain project as a key strategic Public Private Partnership project of national significance, with the potential to stimulate investment in infrastructure and the economy, and to provide opportunities for public transport restructuring and transformation. Payments would be made by the Gauteng Province to the concessionaire in terms of the concession agreement according to the agreed milestone completion schedules. The Province would draw 50% of the funds for payment from the conditional grant and 50% from the Provincial budget in 2006/07. Members raised question around the following issues, amongst others: - the accreditation of municipalities and their capacity to deliver houses. - the role of the national Department of Public Works in ensuring that provincial Departments had capacity to deliver on their projects. - whether the National Housing Builders Registration Council (NHBRC) had the capacity to monitor and evaluate if houses that were being built were of good quality. - whether there was value for money in houses that had been built so far. Some of the houses were built in the middle of nowhere and consequently remained unoccupied. - how to keep a balance between projects because it seemed like there was a rush for 2010 Soccer World Cup related infrastructure. The Department of Minerals and Energy (DME) said that the electrification programme which involved the electrification of Eskom licensing areas such as households, schools and clinics had a budget of R893 165 million. The non-grid providers budget was R84 million. In general this programme had been successful. For example, R55 million had been rolled over from a budget of R992 861 million. There was currently a backlog of 3.2 million connections, which was being reduced at a rate of 216 000 connections per annum. At this rate, it would take 14 years to reach the target, and this did not factor in population growth and inflation. There was greater demand for electrification than there was funding available for it. There had to be more flexibility about how money could be moved around and redirected, and the whole process had to be simplified. National Treasury said that many of the Department’s problems had to do with interpretation, which could have been resolved if they had brought them up at the meetings with the Treasury. Also, they commented on aspects of the Bill that did not really affect them, such as payment schedules for example. The payment schedules were there to provide certainty for everyone, which was important for planning and managing contracts. It was also important to place reasons for withholding money in their annual reports to ensure accountability and transparency. The Chairperson then asked the Development Bank of South Africa for its opinion on the Bill for a different point of view. The local equitable share had almost doubled due to the removal of Regional Services Council Levies. The vertical allocation of the local equitable share among the three spheres of Government was premised on the fact that municipalities had significant power to raise revenue. In reality, especially in rural areas, this revenue base was not there. The Neighbourhood Development Partnership Grant had been created and allocated with a R50 million budget. This budget and the grant had to be carefully managed. What was worrying about the capacity-building grants was that there had been no analysis of the impact of the grants, to see if they were making an impact, especially as there was some duplication in the work some of them were doing. MINUTES Mr M Dlabantu (Acting Director General), Mr N Mbengo (Acting CFO) and Mr J Minnie (Director: Information Management)represented the Department of Housing. Mr Dlabantu made the presentation. (See document attached). The Department of Housing would administer only one conditional grant in the 2006/07 financial year: Integrated Housing and Human Settlement Development Grant. He focussed on the following issues: -purpose of grants - the allocation Formula - the Integrated Housing and Human Settlement Development Grant - the Human Settlement Redevelopment Programme - motivation for retention as Conditional Grants - fund allocations for 2007/08 and spending priorities. Mr L Kganyago (Director General: Treasury) and Mr P Makgoe (MEC: Treasury- Free State) also attended the meeting. Discussion Mr D Botha (ANC)[Limpopo] noted that the Department had developed a specific and targeted monitoring framework for monitoring the Integrated Housing and Human Settlement Development Grant. He asked if the monitoring would relate to both the quality and quantity. In some cases communities had refused to occupy houses that were built for them because of poor workmanship. There was a huge number of unoccupied houses in Limpopo. On paper it looked like the government had built a lot of houses whilst in reality a few of them were occupied. He asked if the Department would have teams across all provinces to monitor the grant. There might be problems if one team was expected to monitor the whole country. Would the Department rely on reports from provinces or would it conduct physical visits to provinces? Mr Dlabantu replied that the Department was beginning to deal with the issue of quality. Older projects had problems and some of them were under investigation. Some of them would be dealt with in terms of rectification and action would be taken against culprits if necessary. Some of the problems could be attributed to capacity. The Department was optimistic that it would improve the quality of houses since it had improved its systems. There were inspectors at provincial level. Mr E Sogoni (ANC)[Gauteng] said that the Minister had indicated that the Department was looking at the quality and size of houses. He asked if the budget allocation took this into account. He had thought that the presentation would also deal with the issue of capacity in relation to the accreditation of municipalities. Whilst there was an Act in place and the desire from the national Department to allocate the function to local government, the capacity of local government was not adequate to ensure housing delivery. He asked how the Department would ensure that there would be delivery. MECs had indicated that there was no proper Housing Departments at local government level. It had been claimed that local government was ready but the expenditure trends had proved that this was not the case. Some people had said that local government should wait for three years before they could be expected to deliver houses. The presentation had indicated that there would be a significant increase in monitoring and evaluation. He thought by now the Department would be able to say that this was what it would do so that the Committee could see if there would be radical monitoring and evaluation. Mr Dlabantu was surprised by the January spending trends. The trends could be explained by the behaviour of the construction sector. The issue of size of houses had been addressed and an announcement had been made around that. The size was increased to 45 square meters. The implication of the increased on money was significant. The Chairperson said that the Department had not submitted quarterly performance reports. He wondered what were the reasons for that. He also asked for the basis of the Department's budget request. The Committee did not want to see a request that was based on sentiment. The Department could not just say that section 17 of the Division of Revenue Act (DORA), 2005, (incorporated under clause 14 of the 2006 Division of Revenue Bill) should be retained and yet do nothing in terms of the provision. The Committee had engaged MECs on the issue of the accreditation of municipalities and nothing had been done at that level. MECs should go back and do audit on lack of capacity in municipalities and not just make general statements about capacity al local level. They should clearly indicate which capacity was lacking and what kind of programmes were in place to address the capacity constraints. The Department had requested that the section that dealt with the accreditation of municipalities should be retained and one would expect to see the Department doing something in terms of the provision. He asked how ready was the Department in terms of accrediting some municipalities and if there programmes to ensure that there would be capacity. There were pilot projects in Ekurhuleni and Mangaung. The Committee was still to see the actual result of the pilots. The Committee would not like to see the extension or retention of the provision should there be no accreditation of municipalities by the Department. The South African Local Government Association (SALGA) had strongly argued that there was capacity and had succeeded in pursuing the Committee to pass the DORA as it currently stood. It was interesting to note that people were beginning to say that SALGA did not have the necessary capacity to deliver houses. Lastly, he asked if the Department was convinced that provinces had the capacity to spend properly. Mr Dlabantu relied that the accreditation programme would need another briefing for Committee to properly understand it. The Department had recognised that it would not be able to accredit all municipalities at the same level and at the same time. The provisions of DORA allowed the Department to firstly deal with those municipalities that were likely to have the necessary capacity. People tended to make general statements about capacity but the reality was that municipalities had different capacity levels. There were commitments that had to be made once municipalities had applied for accreditation. The Department had provided resources to assist municipalities as they began to build their own capacities and this included the issue of the infrastructure required. It was generally accepted that housing delivery should be undertaken by the sphere of government that was closest to the people. In the foreseeable future each province would have one or two municipalities that would be accredited. He did not know what had happened to the quarterly report. The reports had been prepared and the Committee would be given a copy. Ms Mchunu (IFP)[KwaZulu-Natal] said that there were orphans kept in orphanages. There was a need to build houses for them but this was not easy. She asked if it was possible to place them in families. The Chairperson wondered if Ms Mchunu was not raising a foster care issue. He thought that the question should have been directed to the Department of Social Development. Ms Mchunu replied that the building of houses was the competency of the Department of Housing. Mr Dlabantu replied that the accommodation of orphans was a foster care issue. The policy and research people were looking at it and one important issue was how to link with the Department of Social Development. Mr Goeieman (ANC) said that the Committee had once had issues with houses built in Kimberly. He had hoped that the Department would report on the houses. The Committee should get a report on houses built in front of the legislature in Kimberly. It seemed that the Department was satisfied with the quality of the houses although there were not fit for human beings. It looked like the monitoring systems were not up to scratch. The Minister had indicated that six municipalities would be accredited to build houses but nothing had been put forward so far despite that those municipalities had already been identified. The Sol Plaatjie municipality had proved that they could deliver and did not want to make profits by building poor quality houses. Mr Dlabantu said that the Department would provide information on Sol Plaatjie at later stage. The Chairperson said that the NCOP would go to the Northern Cape and investigate all issues raised by Mr Goeieman. Mr Z Kolweni (ANC) (North West) said that the quality of the expenditure in houses was critical. Poor houses were equal to fiscal dumping. There was nothing that indicated the number of housing units that had been rejected. It was good that the size of houses had been reviewed but quality remained the main issue. He wondered who the public should approach to report incomplete houses. The Chairperson said that the Acting Director General had given the assurance that the Department had improved their capacity. Mr Goeieman said that the Committee should not defend the Department. Members were raising issues that were raised in the past and there had been no response from the Department. Ms F Nyanda (ANC)[Mpumalanga] said that the Mpumalanga province still had foundations that had been built three years ago. She asked if there were any inspectors inspecting the houses. Mr Dlabantu replied that Mpumalanga had approved a number of projects a few years ago. It would be helpful if the member could provide specifics about the projects. Sometimes projects were left incomplete as part of a planned stage by stage development. Sometimes projects were held up due to some problems relating to issues like land. The Chairperson said that the Department was expected to focus more of he Division of Revenue Bill. It would account on other matters when dealing with the fourth quarter results in the near future (May). Mr Sogoni asked if the NHBRC had the capacity to conduct the inspections. He asked if provinces had submitted Business plans. Some provinces had built houses in open spaces and such houses were not occupied. Mr Dlabantu agreed that some houses were built in the middle of nowhere. This would be avoided by proper planning of projects. Business Plans were submitted and approved by MECs. The Department had provided funding for the creation of initial capacity in the Council. The Department would monitor the issue and the Council had given assurances that it was building the necessary capacity as it got more projects in provinces. The Department had increased it capacity. In the past the Department had tended to rely on capacity created at provincial level. The Department had now increased its staff level that would go to provinces and see what was happening on the ground. It had dedicated units that would visit provinces from time to time to see what was happening on the ground. The monitoring would include verifying the numbers and looking at the quality of houses built. Capacity was aimed at taking charge of the quality of products. The Department was working with the National House Builders Registration Council who had been forced to do quality assurance. Most of the poor quality houses were built in the era were the Council was not required to do quality analysis. There would be a significant improvement in terms of the quality of houses built. Mr Botha said that the Limpopo province's policy was about taking houses to the people. This meant building houses in their villages. He asked if the houses built in the villages would also be monitored. Presentation by the Department of Transport Ms M Mpofu (Director General: Transport), Mr D Pretorius (Chief Financial Officer), Mr L Mochalibana (Parliamentary Liaison Officer) represented the Department. The Director General gave the presentation. (See document attached). She focussed on the overview of Medium Term Budget allocations, expenditure trends and conditional grants. Mr M Fransman (MEC: Transport- Western Cape), Mr B Cele (MEC: KZN Transport) were also present. Discussion Mr Sogoni said that the bus subsidy was growing. He had thought that the Committee would hear much about taxis because there was supposed to be a recapitalisation process. The Road Accident Fund (RAF) was not budgeted over the MTEF. He asked the Department to explain this. He also asked what was the final price for the Gautrain and if there were no funds directed to local government. The DG replied that the Department was engaged in the restructuring of the RAF. No amounts were indicated for the RAF because the Department had not concluded its thoughts around strategy to be used. The RAF Act and other processes that would inform the amount to allocate to the Fund. The R2.7 billion injected was likely to be trend-setter for future allocations. Mr Mochalibane replied that the 10% increase in subsidies had more to do with the cost of fuel and other operational requirements. It was basically an inflation-related increase. There was an amount of R250 million in the 2005/06 financial year for the taxi recapitalisation. The money was targeted for establishing the necessary institutional mechanisms and systems. There would be a steady increase in the budget in the next coming year because it was expected that people would not be setting up systems but the actual work during that period. The government had set itself a target of scrapping about 10 000 old taxis this year. The amount was only a percentage of the R7.7 billion that had been set aside for the process over seven years. It was expected that there would be an increase in the third and fourth year of the recapitalisation process. The Minister of Finance had announced R20 billion for Gautrain. There were constant discussions between the Department, Treasury and provinces on a whole range of issues related to the project. Ms Mchunu asked if the Department could include the building of pedestrian bridges over rivers and freeways in its programme. Mr Cele replied that bridges were being built and the Department would complete 14 in April. He agreed that there was a need for more bridges. The Chairperson said that there was an amount of R50 million earmarked for Road infrastructure planning and Sani Pass. He asked if the amount was from the Department's coffers to the KZN Department. He also asked the provincial MECs to comment on clause 9(2)(c). There were problems in relation to the Department of Public Works in KZN. He also asked what kind of formula was used in provinces in order to access funding available under the infrastructure grant. Mr Pretorius replied that the R50 million included R25 million in 2006/07 for the KZN Department of Transport for the Sani Pass. The other R25 million was an amount held by the Department for allocation to commission studies, develop decisions support services systems and to oversee the implementation of the roads infrastructure strategic framework. Presentation by Department of Public Works Mr S Phillips (Acting Director General), Mr B Gcilishe (DDG: Expanded Public Works Programme). Mr Phillips gave the presentation. (See document attached). He focussed on: - EPWP-related conditional grants in the Bill - the National Electrification Programme - Progress to date - Support Initiatives and challenges. Mr M Gwala (MEC: KZN- Public Works), Dr F Madlopha (HOD- KZN Department of Public Works) and Mr T Mufamadi (MEC: Limpopo- Public Works) also attended the meeting. Discussion Mr Sogoni asked if the Department was happy with participation on municipalities and provinces in training workshops. The most important question at the moment was how to keep a balance between projects because it seemed like there was a rush for 2010 Soccer World Cup related infrastructure. It had been said that there was lack of capacity in provincial Public Works Departments. The question was what was the role of national Department of Public Works in relation to capacity of provincial Departments. Mr Phillips replied that the national Department had a role to play in the delivery of infrastructure. There was joint MINMEC between the Department and the Department of Education, in particular, around delivery of school related infrastructure. Skilled private sector people were being deployed to assist the provincial Departments of Education and Public Works. It was hoped that the problem of underspending would decrease within the next few years. Mr Botha noted that one of the Department's role was to support implementing bodies by training contractors and engineers in the management of labour-intensive projects and design of infrastructure for labour-intensive construction. He asked of the Department had a database of people it had trained. It was interesting that Departments had always pleaded lack of skills despite the fact that the Department had assisted with the training of people. People who had been trained by the Department could be employed by municipalities and alleviate the skills problem. Mr Gcilishe replied that over 1000 people had gone through high level training that targeted people who were hands on in the implementation of projects. There had been lot of difference following training and there had been need for follow up training in some cases. The main challenge was compliance and not the issue of training. The Department had created a database of trained people. The meeting recessed for lunch. Department of Minerals and Energy (Electricity) Presentation Mr O Aphane, Chief Director of Electricity, said that the electrification programme which involved the electrification of Eskom licensing areas such as households, schools and clinics had a budget of R893 165 million. The non-grid providers budget was R84 million. In general this programme had been successful. For example, R55 million had been rolled over from a budget of R992 861 million. The Government Programme of Action called for there to be universal access to electricity by 2012. There was currently a backlog of 3.2 million connections, which was being reduced at a rate of 216 000 connections per annum. At this rate, it would take 14 years to reach the target, and this did not factor in population growth and inflation. A required rate of 533 000 connections per annum was needed to achieve the target within six years. To achieve universal access to electricity by 2012, an allocation of R2.5 billion was needed. Therefore, an additional R1.2 billion was required on top of the R1.3 billion already allocated. Section 38(i) of the Public Finance Management Act (PFMA) said that the DME had to ensure compliance with DORA. Chapter 1 of DORA calls on them to promote transparency and equity in the resource allocation process, and to promote accountability by ensuring that all allocations were reflected on the budgets of receiving provinces and municipalities. Section 21(d) called on them to transfer funds in accordance with a payment schedule in line with section 31. Section 31 mentions frameworks for each schedule 4, 5, 6 and 7 allocations. The framework set the conditions for the transfer. However, the payment schedule may change depending on project circumstances (housing delays), and the framework may conflict with the payment schedule by requiring that transfers only take place when houses are in place for example. DME recommended that more flexibility be allowed by revising the payment schedules, for example by allowing quarterly reviews. Section 27(2) required them to indicate the reasons for the withholding of any transfers to a province or municipality. The DME was unsure whether all the incidents of withholding of funds per month had to be indicated in their annual report. They recommended that the current reporting format be retained. Section 27(2)(d) called on them to indicate to what extent a municipality was monitored for compliance. How should this be done? It would be onerous to do so per municipality, per month, and then include this as an annexure to the annual financial statements. The DME wanted a template for reporting to help them. According to section 35(1), in the event that a transferring officer withheld money from a municipality, where the municipality did not comply with the provisions of the Act, or significantly under-spent during the financial year, the procedure for withholding the money had to be simplified. There was greater demand for electrification than there was funding available for it. There had to be more flexibility about how money could be moved around and redirected, and the whole process had to be simplified. Discussion The Chairperson asked how the DME disbursed their money. What formula did they use? Mr Aphane replied that the disbursement programme was split between the Eskom allocation and the municipal share. This was a historical issue based on the fact that Eskom held distribution licenses for certain areas, and where Eskom did not have a license, the municipality took over. Money was allocated to municipalities conditionally. The condition was that there must be a clear indication that certain electrification projects had to be undertaken through an application. Again demand exceeded supply here but there was a bias towards the electrification of rural areas. On the Eskom side, there were a number of forums at provincial level which determined how they were going pass on their allocations from the DME to their districts and municipalities. Mr E Sogoni (ANC) (Gauteng) asked if the DME assisted in the provision of free basic services, in this case, electricity. Did they support the PFMA and the Municipal Finance Management Act (MFMA)? Mr Aphane replied that they had no choice but to comply with the law. However, they had some issues with the MFMA that they were dealing with such as the restructured distribution industry which involved rates. The issues were not about an opposition to the legislation, but about ensuring service delivery and conforming to the Constitution. There were two issues relating to free basic electricity: one was funding, which involved an equitable share allocation. The Department was involved in the provision of capital funds, and not involved in this type of funding. The second aspect was the facilitation of the free basic roll-out of electricity itself. The Department was involved with this along with the municipalities and Eskom. National Treasury Reaction Mr L Fuzile from Treasury said that it was difficult to comment on the DME’s presentation as it seemed that they had based their presentation on an old version of the Bill. It was also difficult as the DME was bringing up issues that they should have raised earlier at meetings with the Treasury. Many of the DME’s problems had to do with interpretation, which could have been resolved if they had brought them up at the meetings with the Treasury. Also, they commented on aspects of the Bill that did not really affect them, such as payment schedules for example. They received this money in kind, and did not have to transfer it to municipalities. The payment schedules were there to provide certainty for everyone, which was important for planning and managing contracts. Without the schedules, provinces would not be able to sign contracts as they would not know when they were going to receive their money. It was also important to place reasons for withholding money in their annual reports to ensure accountability and transparency. DBSA Presentation Ms L Dyasi, began by saying that the local equitable share (LES) had almost doubled due to the removal of Regional Services Council (RSC) Levies. The vertical allocation of the LES among the three spheres of Government was premised on the fact that municipalities had significant power to raise revenue. In reality, especially in rural areas, this revenue base was not there. This was the same trend when the horizontal allocation of the LES was analysed. Many poor municipalities relied heavily on the LES and this was set to continue. DBSA asked: to what extent did the revenue-raising capacity component of the LES encourage operational efficiencies or inefficiencies especially in those municipalities with the power to do so? There was also a lack of clarity about how the development component would be administered, and the purpose it would serve. Mr M Tshangana said that the Municipal Infrastructure Grant (MIG) was at R6.3 billion in 2006/07 and was set to rise to R8.1 billion in 2008/09. It was intended to supplement municipal capital budgets to fund backlogs in municipal infrastructure required for the provision of basic services. In reality, the MIG constituted the entire capital budget for most small and rural municipalities. The question here therefore was: to what extent did the administration of the MIG contribute to the low levels of spending of the allocation? The MIG formula was as follows: B (basic infrastructure) + P (public municipal services) + E (social institutions and micro enterprises) + N (nodal municipalities) + M (MIG performance-based allocation). DBSA had noted that it was easier to determine backlogs with respect to the B component. However, it was difficult to determine backlogs with the P component. Also, the M component could be affected by the fact that poor performance was caused by a number of factors. In order to meet the sector backlogs, municipalities were expected to raise a certain amount of money but the poorer one shad no capacity to borrow any money. Mr Tshangana said that the Neighbourhood Development Partnership Grant had been created and allocated with a R50 million budget. This budget and the grant had to be carefully managed. In administering the grant the Government had to make it clear whether it would be application or demand based. Would the real partnerships only kick in in 2008? Would the Government’s 2006/07 allocations focus only on technical assistance? The fact that the budget would grow to R1.5 billion in 2008 probably meant that the public sector participation would not be limited only to technical assistance. What was worrying about the capacity-building grants was that there had been no analysis of the impact of the grants, to see if they were making an impact, especially as there was some duplication in the work some of them were doing. Did these grants support the Project Consolidate initiatives? DBSA did welcome the additional allocation for Project Consolidate. Mr B Jackson added that in building capacity, the DBSA managed the Municipal Financial Management Technical Assistance Project (MTMTAP) on behalf of the Treasury which fed international advisors into local authorities to help them implement the MFMA. Mr Jackson said that the DBSA saw the need to increase the expenditure on infrastructure, but unless these projects were administered properly, serious bottlenecks could arise. For example, the price of cement was going to shoot up just before construction of facilities for the 2010 World Cup began. There was also a need to improve operational efficiencies, maybe by tightening the conditions on some grants. DBSA supported the Gautrain initiative but there had to be a comprehensive public transport strategy to make the whole thing work. It was also important to keep the restructuring of Transnet and Portnet on the agenda, and it was essential that there was professional, well-resourced oversight. The water sector was worrying too. There was a need for a strict accountability in the Water Boards. National Treasury Reaction Mr Fuzile agreed that municipalities were getting a sizeable amount of money as a MIG but were not doing anything else to supplement their income and it was a concern that Treasury was looking into. Another issue was that some small municipalities were receiving miniscule amounts of money and it was important to create the correct environments to allow them to raise money. The Chairman deferred any questions or comments about water affairs until the Department of Water Affairs came before the Committee the following day. The meeting was adjourned.