Local Government Financial Management Grant, Local Government Restructuring Grant; Neighbourhood Development Partnership Grant:

FINANCE SELECT COMMITTEE
10 October 2006
LOCAL GOVERNMENT FINANCIAL MANAGEMENT GRANT, LOCAL GOVERNMENT RESTRUCTURING GRANT; NEIGHBOURHOOD DEVELOPMENT PARTNERSHIP GRANT: FIRST QUARTER PERFORMANCE; SUSTAINABLE COMMUNITIES PROGRAMME

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

Documents handed out:
National Treasury presentation on First Quarter performance of Grants
Development Bank of South Africa (DBSA) briefing: Sustainable Communities Programme
Neighbourhood Development Partnership Grant

SUMMARY
The Treasury took the Committee through the first quarter performance of the Local Government Financial Management Grant, the Local Government Restructuring Grant and the Neighbourhood Development Partnership Grant. Performance outcomes were council resolutions committing to the reforms and the conditions of the Grant.

The Local Government Financial Management Grant was being rolled out to every municipality. With regards to transfers, Treasury had transferred R75 million to 146 municipalities in July and in September a further R29 million would go out to 57 municipalities. Treasury was following up on a daily basis trying to get the remaining municipalities to meet the requirements to get their disbursements. R41 million still had to be transferred to 80 municipalities. Delays were due to non-responsiveness by the municipalities to the conditions attached to the Grants, the non-submission of monthly reports and a lack of information.

The objective of the Local Government Restructuring Grant was to support large municipalities with restructuring. The Grant no longer existed for the outer year of the MTEF, having been included in the Equitable Share. The conditions attached to the Grant were that the municipality had to develop its own restructuring plans. With regards to transfers, R445 million had been budgeted (with R350 million set aside for this year and R95 million had been rolled-over). Partial payment had been made to Tshwane, Cape Town, Emfuleni and Nelson Mandela Bay Municipality due to low levels of spending and only partial compliance with conditions.

The Neighbourhood Development Partnership Grant was meant to provide municipalities with assistance to develop appropriate project proposals for property developments in townships and new residential neighbourhoods that included the construction or upgrading of community facilities and where appropriate, attract private sector funding and input. The Grant had a dual nature in that it funded technical assistance and capital grants.

To date 243 applications had been received from over 60 municipalities with an aggregate request for R5.1 billion for a variety of projects that cost R47 billion in total. Some emerging issues were that township renewal was not prioritised across the country and big cities were under-represented or not represented at all.

The Development Bank of South Africa said that the Sustainable Communities Programme was brand new and was still being piloted. It was a response to a challenge by the Governor of the Reserve Bank to the DBSA to create South African examples of sustainable communities. Memoranda of Agreements had been signed with all the municipalities except for Diepsloot. In Grabouw, the service providers for comprehensive planning had been selected and DBSA funding had already been committed for the Phalaborwa project.

MINUTES
The Chairperson said that the Department of Provincial and Local Government was supposed to address the Committee but its presentation contained incomplete information on the Municipal Infrastructure Grant. The Department would appear before the Committee when they were ready.

Local Government Financial Management Grant briefing
Mr TV Pillay, the Treasury’s Chief Director of Local Government, said that the objectives of the Local Government Financial Management Grant were to provide for the preparation and implementation of the multi-year budgets for municipalities, the implementation of accounting reforms and improvements in internal and external reporting.

Performance outcomes were council resolutions committing to the reforms and the conditions of the Grant. These appeared in the Division of Revenue Act (DORA) framework and schedules as well as the allocations for the Grant. The priority areas of the implementation were the preparation of the requisite plans and the allocation of responsibility was a big issue especially during the roll-out of the Municipal Financial Management Act (MFMA). Not all municipalities had delegated responsibilities to certain senior officials. Municipalities also had to implement and approve the service delivery and budget implementation plans, as well as establish senior management teams and steering committees.

From a strategic perspective, this ensured appropriate implementation throughout the organisation. Some of the priorities were to bring Chief Financial Officers (CFOs) and other officials in the planning, engineering and infrastructure divisions into the steering committees.

Municipalities also had to meet financial commitments on a timely basis and prepare for the quarterly section 71 (of the MFMA) reports on revenue and expenditure. This was one of the key initiatives of the MFMA. There also had to be the implementation and establishment of supply chain management systems and policies as well as reporting on entities, finalising financial statements and building capacity through graduate internship programmes.

With regards to transfers, Treasury had transferred R75 million to 146 municipalities in July. This Grant was being rolled out to every municipality, and in September a further R29 million to 57 municipalities. The reason for the staggered payments was that there were three conditions attached to the allocation: a council resolution, a commitment and an implementation plan. 146 municipalities met these conditions easily but the others did not meet all of the requirements.

Treasury was following up on a daily basis trying to get the remaining municipalities to meet the requirements to get their disbursements. R41 million still had to be transferred to 80 municipalities. Delays were due to non-responsiveness by the municipalities to the conditions attached to the Grants, the non-submission of monthly reports and a lack of information.
In terms of expenditure, the Eastern Cape, Limpopo, Kwa-Zulu Natal, the Northern Cape and the Western Cape all had spending of less than 40%. The reporting at September showed slow spending in 24 municipalities, non-reporting in 56 with 203 being compliant with their reporting arrangements. Over the last two or three months, more municipalities had become compliant.

Treasury was also conducting workshops for the training of councillors and officials in the municipalities to help them understand the MFMA better. A six-module DVD had been developed and a workshop had already been held this last quarter and 30 people attended it. There were nine capacity building sessions with Provincial Treasuries, which 175 people attended. Joint workshops were also held with the Department of Local Government. A roving advisor had been attached to the Eastern Cape about three weeks previously, joining other roving advisors in the North West, Mpumalanga and the Free State.

Other presentations were made in capacity building workshops with donors and to the Debt Issuers Association on the MFMA to encourage them to lend to municipalities that were in a position to borrow money. Presentations were also made to the Department of Water Affairs and the Water Boards on the pricing processes.

Treasury was also working on a number of regulations, guides and projects including the Draft Regulations on Competencies that dealt with section 83 of the MFMA and it would be published soon for public comment. These regulations had a phase-in period of five years. The regulations on Debt Disclosure were also largely complete and would soon be published for public comment as well.

Treasury had assisted three municipalities in obtaining credit ratings while looking at promoting reforms in some municipalities. There were capital investment planning projects in Mangaung, Tshwane and Polokwane. Work-in-progress included the asset transfer framework for municipalities in terms of section 14 of the MFMA and four guiding circulars were issued on the refinements made to the implementation priorities.

Local Government Restructuring Grant briefing
The objective of the Restructuring Grant was to support large municipalities with restructuring. The Grant no longer existed for the outer year of the MTEF having been included in the Equitable Share. The conditions attached to the Grant were that the municipality had to develop its own restructuring plans; finalise all the contractual obligations on the plans; adopt a resolution committing to the implementation of the plans and to show progress in quarterly reports. Transfers would depend on the progressive implementation and achievement of agreed milestones. All Grant agreements would continue until 2008.

Some of the indicators were institutional and organisational such an optimal staff complement, economic development including innovative programmes and financial, including credit ratings, debt and revenue ratios and infrastructure levels.

With regards to transfers, R445 million had been budgeted (with R350 million set aside for this year and R95 million had been rolled-over). Partial payment had been made to Tshwane, Cape Town, Emfuleni and Nelson Mandela Bay Municipality due to low levels of spending and only partial compliance with conditions. Treasury had transferred R160 million for the quarter (July – September 2006).

Measures instituted by the Treasury included getting feedback on the evaluation of performance on a quarterly basis. Visits had been made to Tshwane, Cape Town, Emfuleni and Nelson Mandela Bay Municipality and addressed issues relating to the Grant’s conditions, low levels of spending and the non-compliance with reporting requirements. There were improvements in the submission of, the quality and content of reports. The municipalities had to confirm their commitment and were given notice of Treasury’s intention to withhold allocations. Treasury continued to follow up on outstanding matters during this quarter.

Discussion
The Chairperson asked how much it cost Treasury to follow up daily on the municipalities. The Committee also wanted a list of all the non-performing municipalities to call them in to explain themselves. The Committee also wanted to monitor those municipalities that paid performance bonuses to undeserving individuals. Provincial Treasuries had to be called in to find out what the extent of their interaction with the section 71 reports was.

Mr Pillay said that list of slow spenders and non-performing municipalities would be provided to the Committee by the end of the month after giving them another opportunity to respond to Treasury's requests.

Mr E Sogoni (ANC) (Gauteng) said that the MFMA was going to be phased in over time depending on the ability of municipalities to comply with its regulations. At what stage was the whole process now? There were many capacity problems in municipalities. In those areas without CFOs, how did the Treasury ensure that the requirements of the Grants were met? Reporting on entities in municipalities was poor. Had the municipalities supplied the Treasury with a list of entities in their areas and if they complied with the reporting arrangements? How far had the training of councillors proceeded?

Mr Pillay said that the first year broad implementation schedule identified 50 high, 107 medium and 127 low capacity municipalities. The Minister issued regulations to the effect that certain sections of the MFMA were phased in. However, all municipalities had to comply with section 71. They had had meetings with Provincial Treasuries asking them to collect the information from their municipalities and publishing it. The high and medium capacity municipalities were well under way in implementing the entire MFMA and the low capacity ones would come ‘’on-stream” in the coming year.

He said that their initial research showed that there were 84 – 87 municipal entities. This number was down to 83. Using the relevant sections of the MFMA, information was gathered from the municipalities on the type of entities in their areas; their main functions; their date of establishment; the form of their ownership; whether feasibility studies were carried out; the extent of the entities’ annual budgets and their funding sources.

What Treasury did not do (which they should have) was to map the primary bank account of the entities with the municipality for verification purposes. This was happening now to look at what extent the entities were in line with the MFMA. Gaps existed in determining funding sources but Treasury was insisting on getting signatures of municipal managers next to the list so that it could be published and verified. The Auditor-General (AG) was also aware of these developments. It was interesting that a number of these entities were being deregistered. They wanted to get the list completed within two weeks and then published on the Treasury website.

With regards to training, a training guide for the councillors was issued via the municipal managers’ office and each councillor had to sign for a guide. Part 11 of the guide dealt specifically with which report councillors had to use in their oversight, what audits were and why the Auditor General's report was important, amongst other things. Another part dealt with staff performance bonuses. This was just one part of the guide, which was comprehensive.

The danger with training however was that some service providers were providing substandard training. Therefore, Treasury was validating all of the training material. They were registering two of the level six training modules and registering another six with Wits University Business School.

The Chairperson added that it seemed as though there was support among the Members for the retention of the Restructuring Grant in its current form. It should be monitored this year and next year to make sure that the requirements and the indicators were met before moving it to the Equitable Share.

Neighbourhood Development Partnership Grant (NDPG) briefing
Ms Li Pernegger, the Treasury’s Chief Director for the Neighbourhood Development Project, said that according to DORA, the Neighbourhood Development Partnership Grant was meant to provide municipalities with assistance to develop appropriate project proposals for property developments in townships and new residential neighbourhoods that included the construction or upgrading of community facilities and where appropriate, attract private sector funding and input.

The Grant was to fund township projects that provided community infrastructure and create a platform for commercial investment that supported project partnerships that improved quality of life and facilitated private sector investment, facilitated the mobilisation of ‘’dead capital’ in residential stock and enabled ongoing economic development.

The Grant had a dual nature in that it funded technical assistance and capital grants. In the first year R50 million was set aside, R950 million in the second year and R1.5 billion in the third year. The aim was for the Grant to be in synergy with other grants and had local government focus with no duplication. The unit was established in July and operated with mainly outsourced staff.

To date 243 applications had been received from over 60 municipalities with an aggregate request for R5.1 billion for a variety of projects that cost R47 billion in total. Multi-purpose Community Centres (MPCCs) and precinct development formed 66% of the bids by value. Non-eligible applications formed 21% of the bids and others were for various community facilities.

Some of the high-level observations were that some of the applications demonstrated visionary ‘big bang’ and ambitious township redevelopment. There were many sports and community facilities projects and many were related to broader development strategic aims of the local governments’ own infrastructure development programmes. Private sector interest was also emerging especially in the bigger townships.

Other observations were that some applications were not compliant due to a lack of alignment with NDPG goals, no council resolutions or they were not related to township development. Other emerging issues were that township renewal was not prioritised across the country and big cities were under-represented or not represented at all. There were many applications for former ‘white’ nodes on the basis of changed demography. Project management capacity in local government areas was also poor.

A shortlist of the best 35 projects was adopted in principle by the Treasury NDPG Reference Group and further verification, budget adjustments and allocations and conditions was underway for those 35 projects.

Development Bank of South Africa on Sustainable Communities Programme
Mr Gwede Mantashe, the DBSA Executive Manager of Strategic Initiatives, said that the programme was brand new and was still being piloted. It was a response to a challenge by the Governor of the Reserve Bank to the DBSA to create South African examples of sustainable communities including aspects like social, environmental and economic sustainability while meeting fundamental human needs.

Sustainability principles dealt with the sense of justice, limits, place, history, craft and nature. The six projects were Ba-Phalaborwa in Phalaborwa; Thaba Cheuw in Mpumalanga; Diepsloot in Gauteng; Ngangelizwe and Motherwell in the Eastern Cape and Grabouw in the Western Cape.

Memoranda of Agreements had been signed with all the municipalities except for Diepsloot. In Grabouw, the service providers for comprehensive planning had been selected and DBSA funding had already been committed for the Phalaborwa project. They were also finalising partnership agreements with some private sector companies. This helped to secure markets and opportunities with reduced risk. There would be risk-sharing and co-funding as well as community ownership and broad-based beneficiaries. These would be job creation and labour intensive projects.

Mr X Ndungane, the DBSA Project Manager, then described what was happening in the Phalaborwa project which could be used as a template for application to other areas if it succeeded. He said that there were two main problems that made it hard to improve service delivery in the area. Firstly, there were large distances between areas and the town was growing outwards due to the fact that the land in the middle was tribal land and no-one wanted to deal with this issue.

They had identified that planning was poor in the municipality so the first project dealt with improving the planning capacity and the second project was to develop the town. The third project was one with Unilever which began about seven months ago. They had reached an agreement where community-owned shops and distribution facilities would be developed.

Discussion
Mr Z Kolweni (ANC) (North West) said that the NDPG sounded very good but how would rural areas be developed without accelerating migration to the urban areas and was there not a danger of the development gap between the urban and rural areas widening?

Ms Pernegger replied that they very aware of the tension between rural and urban development. The bias towards urban development in the NDPG was because most beneficiaries were in urban areas. However, there were a few rural development projects included in those top 35 projects.

The Chairperson asked how much of this year’s R50 million allocation had been spent. What was the duration of the Grant and were they planning to pilot any projects? If they were going to simply start the projects without piloting any of the projects, how were they going to deal with the problem of the lack of capacity in municipalities? How were the DBSA and the Treasury going to make sure that there was no duplication in the implementation of the Grants they administered?

Ms Pernegger replied that they had set aside R80 million for technical assistance so they had actually overspent their budget. There would have to be an internal discussion in the Treasury to decide how to deal with this. This Grant was not going to be a short-running one. It was meant to last for quite a long time. They were not going to pilot any projects as there was a “lot of substance” within them already. Capacity problems within municipalities were acknowledged but they were fortunate in that the technical assistance fund could fund project management for the duration of the project.

The objective of the NDPG was not to duplicate the work of any other grant but there had to be some co-operation with other agencies. They had discussions with the DBSA as some of their projects were in that top 35 and they were looking at ways to fund some of the DBSA’s projects. Therefore there was a solidifying working relationship between them.

Mr Sogoni asked why the DBSA did not sign a memorandum of agreement with Gauteng.

Mr Mantashe replied that for some reason it was “just hard to deal with Johannesburg.” He said that if it was up to him, he would have removed it out of the pilot projects but all of the sites had been identified when he took office.

The meeting was adjourned.