Departmental hearings on FFC Recommendations on Dora 2007/08

NCOP Finance

23 May 2006
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
24 MAY 2006
DEPARTMENTAL HEARINGS ON FFC RECOMMENDATIONS ON DORA 2007/08

Chairperson:
Mr T Ralane (ANC) (Free State)

Documents handed out:
Department of Provincial and Local Government Presentation
Department of Housing Presentation
South African Local Government Association Presentation

SUMMARY
The Department of Provincial and Local Government said that that it was appropriate that Conditional Grants must address or deal with the funding of programmes identified as matters of national priority. However, the institutionalisation of programmes by either municipalities or provinces could not suggest that they be phased into the equitable share. The conditionality of the grants should be sustained as long as the national priorities attached to the grants remained. However, the conditions attached to the funds should not exert undue administrative burdens on provinces and municipalities, nor should they stifle sub-national spending autonomy. It was also the Department’s view that the explicit separation of 214(2)(f) of the Constitution from basic services and institutional needs of Local Government expressly required the Government to explicitly address "developmental needs" within the formula.

The Department of Housing said that some of the allegations were that the formula was negatively biased against rural provinces and it did not take account of regional peculiarities, disparities and disabilities. This had been addressed with the inclusion of ‘traditional dwellings’ into the new formula and introducing additional variables that themselves introduced a degree of consistency into the formula. In developing the ‘old’ formula, the 2001 Census was used. This presented a risk of underestimation as this data was outdated. The new formula framework however, allowed for the use of published official Mid-Year estimates from Statistics South Africa. Demand and need for housing was growing at a faster rate than the ability of Government to provide a sufficient number of housing units. Increased funding was needed and substantial capacity building programmes had to be undertaken.

The South African Local Government Association said that with the Infrastructure Grants, the rrecommendation for funding of maintenance costs (rehabilitation and replacement of dilapidating infrastructure) was supported and Government needed to work out the technicalities of including this variable in the Municipal Infrastructure Grant (MIG) formula. With the Health Conditional Grant, municipalities especially the metros and those with secondary cities still continued to render primary health care services, and as such there was a need to determine their exact spending on this service. Provincial government had to reimburse the municipalities affected for these costs as long as the municipalities continued rendering this service. SALGA supported the FFC’s views that development component be removed from the Local Government Equitable Share Formula as it added no financial value for municipalities.

MINUTES
Department of Provincial and Local Government (DPLG) Presentation
Ms S Makotoko, the Acting Deputy Director of Systems and Capacity Building, said that the Financial and Fiscal Commission (FFC) recommended that, "Conditional Grants (CGs) should only be used address spill over benefits and to deal with the funding of programmes identified as a matter of national priority that still need to be institutionalised in provincial or municipal budgets. In the latter case, such CGs should be phased into the equitable share once programmes has been institutionalised by provinces and municipalities." Their response was that it was appropriate that CGs must address or deal with the funding of programmes identified as matters of national priority. However, the institutionalisation of programmes by either municipalities or provinces could not suggest that the CGs be phased into the equitable share.

The ultimate measurable objective of the CGs should be indicated by the institutionalisation of a particular funded programme (through conditional grants) into the municipal business processes. This would ensure that CGs were not used to fund similar outputs or national priorities over and over again.

With respect to the design of CGs, the FFC recommended that "The grants should be targeted to specific spending programmes with associated conditions but overtime these conditions could be relaxed to allow for greater sub-national spending autonomy and the grants may, eventually, be made unconditional". DPLG’s response was that the conditionality of the grants should be sustained as long as the national priorities attached to the grants remained. However, the conditions attached to the funds should not exert undue administrative burdens on provinces and municipalities, nor should they stifle sub-national spending autonomy.

In its review of the Local Government Equitable Share, the FFC recommended that "Government should revise the current estimated cost if basic services to reflect current realities," "Government should consider raising the current basic services cost to R175," and, "[i]n the longer term, the efficiency of the LES formula in addressing its stated principles and objectives would be enhanced if a comprehensive review and assessment of the cost of providing basic public services was urgently undertaken."

The DPLG was of the view that while it was important to review cost parameters, and have them reflect as far as possible the true cost of providing basic services, the cost parameters for the four services were revised in 2004 together with the revision of the formula. In addition, raising or reviewing the basic services cost parameters in the formula should be done in a manner that takes into account the minimum standards for proving those services as set by the relevant sectors. Also, regardless of what the true cost of proving basic services was, the amount provided for in the formula would be reflective of what Government could afford as the grant is meant to subsidise the cost incurred by municipalities to provide services. A comprehensive review of the cost of providing public services would indeed assist national government in addressing its long term objectives with respect to Local Government service delivery.

The FFC also made comments on a Local Business Tax (coupled with a Business License Fee). It said that, "The National Treasury proposal does not clarify explicitly whether municipalities will generally have some leeway in the setting of local business tax rates". Regarding the administrative convenience arrangements whereby SARS was a collecting agent for municipalities, the, "FFC does not necessarily doubt the administrative convenience of this arrangement; it is not clear whether this proposal serves the interest of enhancing the fiscal capacity of Local Government."

The DPLG concurred with the comments by the FFC. In addition, regarding the Local Business Tax, the constitutional issues pertaining to the various options were cited in the National Treasury document titled "Options for the Replacement of RSC and JSB levies," but without a firm legal opinion being offered. What was required was a firm definitive legal opinion so that we have viable options from a constitutional perspective. With regard to the administrative arrangements, as long as the Local Business Tax had some element of Local Government fiscal autonomy, especially with regard to municipalities granted the power to set the tax rates, Local Government fiscal autonomy was enhanced. Also, the issue of staff who administered the RSC levies at municipal level was not addressed by the Treasury document especially if SARS was to act as a collecting agent.

Regarding the VAT zero rating of municipal property taxes, the FFC said that it "noted the advantages listed by the Treasury, and noted that if the national fiscus was willing to sacrifice some tax revenue to accommodate this measure, this proposal will help to streamline municipal property taxes within the VAT system". Although the DPLG had no problem with the proposal, the option would benefit only local and metropolitan municipalities but not district municipalities, as the district municipalities had no power to levy rates with the exception of district management areas. Therefore, this option was not an appropriate option to replace RSC levies for district municipalities.

On grants, "The FFC supported the transitional arrangements for the replacement of the RSC/JSB levies since they were temporary and were meant to ensure that municipalities were not negatively affected by the abolition of the RSC/JSB levies." Although the DPLG supported the transitional arrangements for the replacement of the RSC/JSB levies, it did not support the notion of ‘C’ grade municipalities entering into "funding arrangements" with ‘B’ graded ones. This option could complicate the relationships between ‘Bs’ and ‘Cs.’

The FFC made recommendations regarding a long term revenue instrument replacement proposals saying, "The need for wider discussion about the overall objectives of local government revenue and expenditure assignments and how these are expected to be aligned with the new proposals. The replacement of RSC/JSB levies should be viewed as an opportunity for aligning the local government fiscal framework with assignments of powers and function." The DPLG concurred with the comments that the replacement of RSC/JSB levies should be viewed as an opportunity for aligning Local Government fiscal powers with the division of powers and functions. In addition the decisions as to which categories of municipalities (A, B or C) were assigned the new local taxes or a mere grant funding should be based upon the powers and functions that individual municipalities performed. The current exercise of the review of the two tier Local Government system would impact on the division of fiscal powers and function.

In its review of the development component of the Local Government Equitable Share, the FFC said that "the development component will not result in an overall increase in the local equitable share (LES); The Commission thus recommends that a development component should not be added to the current LES formula." "The development needs of Local Government should be better accounted for in the LES formula by designing a formula that more fully accounts for the full expenditure needs of Local Government."

The DPLG said that not enough exploration on the merits and demerits of either the inclusion or exclusion of this component, or aspects of development in the formula had been undertaken and therefore such a recommendation may be premature. Section 214(2)(f) of the Constitution should be explicitly addressed by Government in determining the equitable division of revenue to Local Government. This was not explicitly done in the current formula and its being set at zero was done specifically so that Government would explore the feasibility of its inclusion.

Until Government (together with the FFC) had determined beyond doubt that there was no feasible way to address the "developmental needs of Local Government" through the formula, its inclusion should remain a possibility. It was also the DPLG’s view that the explicit separation of 214(2)(f) from basic services and institutional needs of Local Government expressly required the Government to explicitly address "developmental needs" within the formula.

Department of Housing Presentation
Mr N Mbengo, the acting Chief Financial Officer, said that the MinMec had approved and amended the housing formula and it would be phased in from the 2007/08 financial year. The formula described in the 2006/07 report had been revised, with the majority of the issues the report raised being resolved.

Some of the allegations were that the formula was negatively biased against rural provinces and it did not take account of regional peculiarities, disparities and disabilities. This had been addressed with the inclusion of ‘traditional dwellings’ into the new formula and introducing additional variables that themselves introduced a degree of consistency into the formula. Other concerns were that the number of homeless people was not an officially published statistic, and some of the variables used were volatile in nature. These were been identified as challenges and had been addressed by leaving homelessness out of the new formula, and by making use of the latest available and accessible official statistical data.

In developing the ‘old’ formula, the 2001 Census was used. This presented a risk of underestimation as this data was outdated. The new formula framework however, allowed for the use of published official Mid-Year estimates from Statistics South Africa. The ‘old’ formula contained a poverty component that was favourable to provinces experiencing rapid urbanization but in the reviewed one, the poverty component was based on household income and was fair to all provinces.

There were also differential costs of meeting the same minimum housing standard across different provinces, and did not take into account regional issues, such as building and land cost differences in different provinces. This is acknowledged as a challenge. Consistent and readily available data that could act as indicators had to be investigated before this should be considered. Another concern was that the formula did not take into account rural housing but had been addressed with the inclusion of share of traditional dwellings and share of labour tenants. It was also important to ensure that rapid delivery of housing targets did not result in compromised or poor quality housing. Efforts were underway to identify problem areas and address them accordingly.

Demand and need for housing was growing at a faster rate than the ability of Government to provide a sufficient number of housing units. Increased funding was needed and substantial capacity building programmes had to be undertaken. In addition to the backlog of 2.7 million (for 2005), it was expected that during the next ten-year period, an additional 1.1 million households would be created that would require housing provided by the Department. This meant that the estimated number of housing units that should be delivered during the ten-year period was approximately 3.8 million units.

Delivery could be constrained by the limited capacity of the construction and building industry. The pressure on Government to deliver, coupled with the constraints on the implementation side, may impact negatively on the requirement for minimum quality standards to be met. The challenge was now to attract big contractors back to affordable housing market while ensuring that the Broad Based Black Economic Empowerment Act was adhered to.

South African Local Government Association (SALGA) Presentation
Mr S Wasa said that the FFC recommendation calling for government to consider increasing the estimated cost of basic services was long overdue and is such supported. Government should consider using this estimated cost to determine allocation to Local Government rather than using budget constraints as an excuse, and thus having to just re-adjust allocation between municipalities of already determined funding envelope.

It must be noted that the Constitution states that there was a need to ensure that the municipalities were able to provide basic services and as such National Government defined basic services that should be provided for free to the poor such as 6kl water and 50kw electricity. The Committee must note that these standards were effectively imposed on Local Government that provided these basic services, and they just had to comply with them.

With the Infrastructure Grants, the recommendation for funding of maintenance costs (rehabilitation and replacement of dilapidating infrastructure) was supported and Government needed to work out the technicalities of including this variable in the Municipal Infrastructure Grant (MIG) formula. The MIG formula seemed to be allocating more funds to municipalities that had the potential to raise more revenue, and thus there was a need to build the revenue raising capacity into the formula so that the formula addressed the MIG policy framework objectives of addressing basic infrastructure to the poor. The current formula did not take into consideration issues regarding the unit costs of providing basic levels of infrastructure. Under practical circumstances, it was more expensive to put up infrastructure in sparsely populated areas than in densely populated areas due to long distances between the areas.

With the Health Conditional Grant, municipalities especially the metros and those with secondary cities still continued to render primary health care services, and as such there was a need to determine their exact spending on this service. Provincial government had to reimburse the municipalities affected for these costs as long as the municipalities continued rendering this service.

The FFC’s recommendation on the National Housing Allocation Formula in the previous year resulted in the provision of R50 million per year specifically allocated for municipal capacity building as part of the accreditation process. However this amount needed to be increased. The condition for municipalities to be allowed to retain a percentage of all housing subsidies in order to fund programme management and administration costs should be included in the accreditation agreements.

The Government undertook that the source of funding replacing the RSC levies would be legislatively protected before 1 July 2006. This had not happened, leaving municipalities vulnerable to the whims of Government at budget time. Instead National Treasury would be tabling a Constitutional Amendment Bill proposing among others the repeal of item 21(6) of schedule 6.

SALGA supported the FFC’s views that development component be removed from the Local Government Equitable Share Formula as it added no financial value for municipalities. As it was difficult to define development and find relevant data to use in determining allocation, this would result in a compromise in the formula principles and objectives. Also, unlike CGs, the unconditional transfers could not induce the municipality to spend more for services defined within the component of the formula, unless additional policy frameworks as was the case for municipal free basic services, was provided for.

Discussion
Mr E Robertson (ANC) (Eastern Cape) said that it seemed as though communities had no input in where their homes were built and this was unfortunate. This led to homes being unoccupied.

Ms M Robinson (DA) (Western Cape) asked the Department of Housing how accurate the statistics they used to develop their new formula were. The Department needed to be more flexible about getting larger contractors to bid for housing construction contracts. They could also get the communities to help in building their own homes, encouraging them and developing their skills.

Mr Mbengo replied that the Department was wholly dependent on Statistics South Africa for their information and they trusted their reliability. They were compelled to use only the officially published statistics. The Department met with large contractors last year to find out why they were no longer interested in low cost housing development. They raised issues such as delays in payment and getting approval as some of the reasons. The Department was in consultations with the Land Department to help reduce some these delays and get the contractors involved again.

The Chairperson asked SALGA to do an audit of all the municipalities that were providing basic health care and provide a report to the Committee within two months. He suspected that doing this reduced their equitable shares. The Committee also wanted to know how the provinces were reimbursing the municipalities.

Mr E Sogoni (ANC) (Gauteng) remarked that the MIG allocations seemed to be biased towards big municipalities. He asked DPLG why this was. Was it based on the municipalities’ capacity and ability to spend or some other factors?

Ms Makotoko replied that she was not in a position to answer this as she was unsure whether it was a fact that the bias existed.

Mr B Khumalo from the FFC was worried by the Department of Housing’s removal of homelessness from the new formula. Homelessness was an obvious indicator of need, and it was wrong for them to remove it simply because of inaccurate statistics about how many people were homeless. More information was needed on this.

The meeting was adjourned.

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