A summary of this committee meeting is not yet available.
PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
22 May 2007
SA LOCAL GOVERNMENT ASSOCIATION (SALGA) ANNUAL REPORT 2005/06; MUNICIPAL FISCAL POWERS AND FUNCTION BILL: BRIEFING
Chairperson: Mr S Tsenoli (ANC)
Documents handed out:
SALGA Annual Report Powerpoint presentation
SALGA Annual Report 2005/06
SALGA Detailed Action Plan to avert disclaimers
National Treasury Powerpoint: Briefing on Municipal Fiscal Powers and Functions Bill
Municipal Fiscal Powers and Functions Bill [B9-2007] as introduced on 04 May 2007
The South African Local Government Association briefed the Committee on its Annual Report for 2005/06. Its Annual Report had not been submitted on time due to some problems in providing documents to the Auditor General. SALGA had received a disclaimer from the Auditor General in the 2005/06 year, and the reasons and steps taken to address the issues were fully summarised.
The various programmes, and the achievements and challenges under each, were outlined. Repeating challenges across all programmes were lack of capacity on the part of municipalities, and lack of clear policies and guidelines. The role played, particularly in regard to the Department of Provincial and Local Government, was set out in respect of each area. The programmes included international relations, municipal communications, governance and intergovernmental relations, municipal finance and fiscal relations, social development, municipal services of housing, water and sanitation, and skills development. Labour relations and human resources were also set out. The capacity of offices, employment equity, income growth over three years, membership levies, and areas of major expenditure were also tabled.
Questions by Members addressed SALGA's representation of municipal interests and what it was doing to protect municipalities, whether there had been resignations of municipalities from SALGA, its relationship with the Department of Provincial and Local Government, the impact of its input, and the relationship with the Sector Training Authority. Members felt that SALGA was perhaps not being proactive and aggressive enough in relation to unfunded mandates and skills programmes, and asked about the trends in income, the trends in collection of own revenue, and the problems related to the Audit. The youth policy strategy, steps taken to correct outdated legislation, communications strategies, water and sanitation, participation in the bargaining processes and the lack of capacity in ward committees were also raised. Members were concerned that lack of capacity was a recurring issue, and asked SALGA to send through a detailed strategic plan, full figures on funding, an indication of the issues raised in the forensic report and to continue to keep the Committee apprised on a regular basis of developments.
National Treasury gave a briefing on the Municipal Fiscal Powers and Functions Bill, which aimed to regulate the process of initiation of a municipal tax and to define the manner in which National Government, through the Minister of Finance, must exercise its policy oversight role. It aimed to have municipal taxation powers proactively regulated, to set frameworks for introducing new taxes, to ensure they fitted within the national and local government fiscal and taxation framework, and to prescribe norms and standards. It would therefore promote predictability, certainty and transparency. The Chapters of the Bill were described in depth. Explanations were given on the replacements of the Regional Services Council levies. The basis for the future calculation and transparency on municipal surcharges was explained. The Minister’s powers and duties were set out. National Treasury did not anticipate any adverse financial implications for national or provincial government and only perhaps limited implications for local government. A full consultative process was followed.
Questions by Members related to overlaps between this and other legislation, the anticipated time frames for introduction of the legislation, the correlation between the new systems and the Regional Services Council levies, the distinction between tariffs, levies and taxes, whether municipalities could continue with existing taxes, and whether it was appropriate that the Minister of Finance should be given the power to enforce this legislation. Further questions addressed the practical challenges that the Bill would address, the necessity to introduce this legislation in view of the wording of Section 229 of the Constitution, macro-economic responsibilities, and the continued support of municipalities.
South African Local Government Association (SALGA): Annual Report 2005/06 Briefing
The Chairperson indicated that this was a follow up meeting and that previous interactions had attempted to iron out issues, including the time within which they were required to submit annual reports.
Mr Xolile George, CEO: SALGA, noted that this report would be covering all the programmes during the 2005/06 year. The programme and reporting was regulated by the Public Finance Management Act (PFMA) that required any public entity to report within five months of the end of the financial year. SALGA had had some problems in doing so, due to the changes in the reporting protocol of the Auditor General's office, which had required re-submission of accounts.
In the field of international relations, SALGA had provided administrative and technical support to the Constitution of the United Cities and Local Governments of Africa (UCLGA), which led to establishment of ten working groups. It had facilitated various meetings between Ministers and the diplomatic corps. It had also facilitated partnerships with other national associations of local government elsewhere in Africa, and had mobilised African municipalities to take part in the United Nations' Millennium Towns and Cities Campaigns. Challenges in this field included lack of sufficient budget and the dynamics of the international relations, including language difficulties.
In municipal communities, SALGA, in collaboration with the Department of Provincial and Local Government (DPLG) and Government Communication and Information Service (GCIS) had hosted a national conference on local government communication in May 2006. It had developed a five year communications plan. It had mobilised citizens to participate in local government elections and produced a handbook contained guidelines and communication structures. Challenges included location of municipal communication offices and lack of capacity at those offices.
Under Governance and Intergovernmental Relations SALGA had assisted district municipalities with establishment of District Intergovernmental forums. It had developed a comprehensive policy position on the review of the Councillor Support System including remuneration. The achievements in this area included joining forces with the provincial legislatures on matters of incorporation of former cross boundary municipalities. Project Consolidate was dealing with deployment of staff. Further achievements related to the drawing of guidelines of allocations of powers and functions to municipalities to ensure the interests of local government were protected. A post election guideline was developed. Challenges around local government legislation related to lack of capacity, and division of functions and powers between district and local municipalities and the current system of councillor remuneration. Some Ward Committees in certain areas were not functional. There was also lack of clarity on governance.
In the area of municipal finance and fiscal relations, SALGA had made submissions to National Treasury (NT) in June on the Regional Services Council levies discussion document, and had responded to the Financial and Fiscal Commission (FFC) on the recommendations for the multi-budgeting framework for the equitable share. It had made input to other committees as set out in the presentation. Challenges in Municipal finance centred around lack of understanding of transfer systems, difficulty in obtaining information from some municipalities and some provincial auditor-general offices, difficulty with data collection and the lack of establishment or functionality of District Area Finance Forums.
The Social Development Unit implemented policy on HIV Aids, gender programmes and youth development. There were challenges in lack of sustainability, no clear government policy for people with disabilities, and lack of coordination.
Under Housing, SALGA had a partnership with the Dutch Local Government Association. This had resulted in social housing pilot projects. It had developed and implemented programmes on social housing, and had launched a newsletter to ensure that lessons learned were communicated. It participated in the Comprehensive Strategy for Sustainable Human Settlement Plan. The challenges included implementation of this strategy, availability of suitable land, implementation of municipal owned land, and the Housing Accreditation Framework.
SALGA's work in water and sanitation was set out. It had conducted focus groups and developed a concept paper. There would be challenges in meeting the water and sanitation targets and the targets for the eradication of the bucket system.
Under the Skills Development programme there had been a councillor induction programme that was attended by 6 474 new Councillors. An Executive Leadership Municipal Development Programme, which was intended for key local government decision makers, was being run as a degree-level course in conjunction with the University of Pretoria. Challenges included literacy levels of councillors, the need to cater for physically challenged councillors, the high costs of the centralised programme, and difficulty in obtaining funding from Sector Education and Training Authorities.
SALGA had a further programme dealing with labour, and had reached a collective agreement, extended some original service agreements to 2011, published job evaluation results for 56 municipalities and had set wage tariffs. The industrial councils under the previous demarcation were now being reviewed and there was constructive engagement in the bargaining council to ensure that all these agreements were being replaced. The implications of the singe public service were being investigated. Standardisation of conditions of service was being pursued through collective bargaining with trade unions.
Issues of HIV and AIDS were handled through a partnership to set up minimum standards to assist municipalities to deal with these issues. Some municipalities still lacked coordinators, and lack of credible data was a problem that made it difficult to ensure accurate planning. Compliance with the Municipal Finance Management Act (MFMA) was also still a problem and SALGA was also assisting where it could.
Mr George noted that SALGA presently had 232 staff. He summarised the number of vacancies and the situation over the last year. Employment equity was still a challenge as there were insufficient women at senior and top management levels. The breakdown of staff was tabled.
Insofar as finances were concerned, SALGA showed a modest growth in income in the 2005/06 year. Membership levies were rising, and SALGA was intending to manage these levies better. The income analysis over the three-year period was tabled, and it was noted that the income came from equitable share, municipal levies, donor funding (which was diminishing), sponsorship and other income. From time to time resources must be adjusted to meet the budget.
The audit report had challenges from 2004/05 and 2005/06. There was a disclaimer, because SALGA had consolidated its financial statements for the first time in 2004/05. A forensic audit had thrown up a number of problems. SALGA had now implemented some of the key findings and had put in place a number of key corrective measures, including an outsourced internal audit function. An audit Committee was appointed to ensure strong oversight. A detailed action plan to avert future disclaimers was developed. It had appointed a chartered accountant as full time staff member. KPMG accountants were engaged to look at the historical issues and assist with the backlog of the opening balanced. There was a standardised financial management procedure and staff were being trained to meet the required skills.
Mr P Smith (IFP) asked SALGA to explain what "joined forces with DPLG" meant. He thought that SALGA would represent the interests of the municipalities, and therefore asked what it was doing to protect municipalities that were dissenting against incorporation into the provinces.
Mr Mshudulu said that some municipalities had apparently opted not to join SALGA. He asked if there was still a split in areas, and how that would be managed from a political level. He reiterated the concerns of Mr Smith that SALGA held the sole bargaining rights to represent municipalities, and asked how they could reconcile this role if they were in fact not representing all municipalities.
Ms Hazel Jenkins, Deputy Chairperson, SALGA, responded that all 283 municipalities were members of SALGA. Some had indicated their intention to resign from SALGA. Those letters did not comply with constitutional requirements and therefore the municipalities had been informed that the letters were not valid. Since that communication there had been no further correspondence on the resignations. SALGA had embarked on a road show to address the labour relationship issues and the impact this would have on municipalities. From Head office and Cape Town, officials and councillors had visited West Coast, Cape Winelands, George, Overstrand and Beaufort West to interact with municipalities and to answer the questions they might have on issues.
Mr Peter Smith followed up on the cross boundary issues. He agreed that it was important to diffuse the tensions. However, he was still not sure to what extent SALGA would represent the interests of the municipalities who did not agree that they should be incorporated. SALGA did not appear to have defended the interests of municipalities against provinces.
Mr George replied that SALGA felt that it was acting in the best interests of municipalities. The specific cross-border programme had dealt with municipalities that were struggling through their physical placement in the middle of two provinces. One province might follow a certain procedure whereas the other province would not. SALGA was aware of issues causing a problem and was actively trying to address them.
Ms Hazel Jenkins said that SALGA was working with DPLG as its Minister had been tasked to handle these issues. The work was taking place at both a political and administrative level as some of the issues related also to the old demarcation process and the challenges arising from that. SALGA would work within the rules to ensure that the challenges were addressed but it would not dictate to councils what they should do.
Mr Smith noted that input had been made on allocation of powers to municipalities, including unfunded mandates. He would be keen to see what the impact of input was. In Durban there was a proposal to raise both electricity and rates by 10% because of unfunded mandates. He believed that unfunded mandates were not being properly addressed and enquired how effective the lobbying had been.
Mr Sabelo Wasa, Chief Operations Officer: SALGA, responded that this was indeed a recurrent problem in local government. SALGA had prepared a comprehensive report for NT, highlighting strongly the problems faced by municipalities. There was still a challenge, in the sense that some municipalities could not identify exactly their unfunded mandates. By way of example, SALGA had found that a municipality in North West was intersected by a provincial road, which was essential for trade and ongoing economic growth in the area. The provincial government allocated only R4 000 per annum for upkeep and the municipality had to find its own funds for repairs. SALGA had also notified the Select Committee on Finance of the problems and had requested assistance. SALGA was working with the FFC who were developing a comprehensive report and carrying out investigations into transferring mandates between different spheres of government. SALGA had proposed that there should be a series of checks before deciding whether a certain function could be transferred. SALGA would be engaging also with other stakeholders on 4 June.
Mr Smith was concerned that SALGA was not doing enough in relation to unfunded mandates. He believed it was no use simply to present a paper to NT. He asked if SALGA had urged municipalities to drop unfunded mandates, to take a hard line on the issue, or to take legal opinion.
The Chairperson agreed that unfunded mandates needed to be raised as a quite specific issue. He asked how often municipalities were raising rates to cope with unfunded issues. This spoke to the relationship between the different spheres of government. Details were important as they went to the heart of budgeting. He noted that there were sanctions provided, but enquired if these were being used.
Ms Jenkins responded that SALGA was raising these issues, perhaps not as aggressively as Members might like, but took the point that this was important. She indicated that SALGA was not only pursuing the question of unfunded mandates but also was undertaking certain agency functions that had caused problems. Late release of money from departments who had given mandates for agency work meant that municipalities might have to tap into their own coffers to pay staff. The main culprits were the Departments of Roads and Public Works , who tended not to release funds in time.
Mr Smith noted that the skills development programmes were challenged by difficulty in getting funding from the Local Government Sector Education and Training Authority (LGSETA). However, this SETA had informed the Committee that it was challenged by the Municipality's failure to apply for funding. He asked for clarity
Ms Jenkins replied that many municipalities, when applying for funding, sent incomplete forms to the SETA, which was the reason why money could not be released to the municipalities. There were a number of applications that had not supplied the crucial information.
Mr Smith enquired why the income growth was showing the particular trends tabled, as he thought that 52% of funding emanated from membership levies, which had in fact increased over the last year.
Mr Nonkonyana questioned whether municipalities were becoming more sustainable and the dependency syndrome lessened by their capacity to collect own revenue. He asked how far this had progressed, and whether some municipalities were already viable.
Mr George indicated that in fact 93% of all municipal income was derived from own sources, and only 7% was dependent on grants. SALGA did not yet have an answer on how it could move away from being dependent on grants. After restructuring of local government municipalities had a number of challenges, arising in part from the drop in numbers of municipalities, and the fact that on amalgamation all municipalities were paying different salaries and were categorised differently. Municipalities currently depended on grants for running costs. Hopefully one day they would be fully self-sustainable.
Mr Smith noted that these figures did not seem to correlate with what had been provided to the Committee by National Treasury and indicated that he would like further clarity.
Mr Wasa added that in terms of the income there was a fairly equal spread between membership levies and other income. However, in 2005 and 2006 the income from membership levies had grown. That was the reason for the large difference in the graphs tabled. He added that there were still challenges in payment of levies.
Mr Wasa confirmed that the exact figures would be sent through. He indicated that there was a difference in funding models across different municipalities and the graphs had tabled averages.
Mr Smith asked for details of the problems that led to a disclaimer from the Auditor General (AG). He noted that since most of the problems were described as arising in the 2004 year these should not have affected the year under review now. He also asked what the forensic audit had revealed.
Mr Wasa said that the CEO had already mentioned that the financial statements had been consolidated during the 2004 financial year. The issues raised by the Auditor General in fact still related to that period. That was the reason for engaging an outside firm to try to clean up the figures. When the problem was revealed, it also became clear that the problems had in fact started in 2001, despite the fact that "clean" audit reports had been given. Part of the reason for that was that the private firms who had performed the audits on the provincial offices were auditing according to different standards to those used by the AG. It was impossible at the moment to pinpoint all the issues as the audit report had been referred to the Scorpions unit for further investigation. The action plan gave the details of what SALGA would be doing to correct old issues. KPMG had been hired not to look at the technicalities arising from this current audit report but to try to get a better reconstruction of the position from 2002 to 2004 and to address outstanding issues from this period.
Mr Mshudulu asked what informed the youth policy strategy of SALGA and how it would ensure that the youth would participate in integrated development planning forums and Committees.
Mr M Swathe (DA) enquired what age groups were envisaged as "youth". He also asked how they would participate in local government, and whether they were expected to participate through specific projects of SALGA, form their own projects, or be empowered by working for local government.
Ms Jenkins said she would like to see that municipalities budgeted properly for youth strategy. She indicated that one of the current projects assisted the youth in obtaining drivers' licences so that they could be readily available for the job market.
Mr Wasa clarified that there was one category for youth under eighteen, and another for youth between 18 and 32 years old. At the under -eighteen level, municipalities should ensure that there were activities in which youth must participate, and this included ensuring that recreational facilities were available. For those between 18 and 32, municipalities must ensure economic participation, such as through a certain percentage of suppliers coming from that category, or youth training programmes, to ensure that economic development was encouraged.
Mr Mshudulu noted that there was an absence of local government legislation on sports and recreation, and arts and culture. He reiterated that this had been the concern of the Committee for some time.
Mr Mshudulu noted that many of those working with the audits were junior managers. He asked in what ways could SALGA monitor and correct outdated legislation and by laws.
Ms Jenkins noted that SALGA had done some work on outdated laws, but admittedly it had not performed a follow up. There were generic by laws for each province that could be adapted and adopted by various councils.
Mr Mshudulu asked that the employment equity figures be provided to the Committee.
Mr S Nonkonyana (ANC) asked why, in the slides dealing with international relations, the President of Mozambique had been listed before the South African President.
Ms Jenkins noted that this was inappropriate and that the oversight would be corrected.
Mr Nonkonyana asked for further explanation on communications forums and structures.
Mr Wasa said that the five year local government strategic agenda looked to a whole range of issues, including capacity and support and governance. SALGA was trying to assist in communicating on those issues that affected the municipalities.
Mr Nonkonyana also referred to border issues. In North West, Gauteng and Mpumulanga there were tensions and he asked what role SALGA was playing to diffuse these.
Mr Nonkonyana raised the question of water and sanitation in the rural areas, asking SALGA to indicate what was the state of affairs on basic water and electricity services.
Mr George stated that some of the goals, such as eradication of buckets, scheduled for end 2007 were delayed and there were problems. DPLG and SALGA had put a programme in place to ensure that there were mechanisms to expedite the process and ensure that those municipalities that were severely challenged were assisted. SALGA was trying to ensure that achievement of these targets would not be hindered by other problems. Project Consolidate was already assisting those municipalities with severe capacity problems.
Mr Nonkonyana noted the remarks on the labour relations challenges, with the former industrial councils still showing some resistance. He asked what the issues were and whether there was a likelihood or fear that the trade unions were likely to lose out on what they already had.
Mr George responded that SALGA had participated in the bargaining process, when it became clear that there were still certain conditions of service in place that tended to favour certain employees through various benefits. These benefits did not conform to the uniform SALGA conditions. By June it was hoped to reach a harmonious conclusion. He mentioned that the old Transvaal Industrial Council was still using categories with old terminology that was not in keeping with the spirit and provisions of the labour law, and that issues such as this would need to be addressed.
Mr Nonkonyana was interested to know the relationship of SALGA and the Cities Network.
Ms M Gumede (ANC) asked about the Ward Committees, which were not yet addressing the needs of the communities, and wondered if SALGA was arranging any workshops. She asked if the skills development and executive programmes to train councillors would help improve delivery of services by those councillors.
Further, she noted that the inter governmental programme implementation was hampered by lack of capacity in municipalities. She asked if this too would be overcome by the training and agreements that SALGA would do.
Following on from this, Ms Gumede noted that lack of capacity was a recurring issue. She asked whether SALGA would ever visit the municipalities to check the situation on the ground. Although there might be capacity in the sense that someone was occupying an office, she indicated that many councillors were under performing. She asked how SALGA could ascertain whether they were actually working effectively.
Ms Gumede asked why SALGA had concentrated on only one SETA for skills training. She felt that other SETAs, apart from the LGSETA, could also impart skills, mentioning areas of public works and management.
Mr George took the point that SALGA should also look at other sectors, as well as the level of communities. He reiterated that some of the applications to LGSETA had not been successful because of the quality of the business plan submitted. Therefore SALGA, together with DPLG, was looking at other interventions to try to create joint programmes to address the skills requirements of priority skills acquisition and the skills that would tie in to the Accelerated Shared Growth Initiative (ASGISA).
Ms Jenkins pointed out that the report before the Committee was addressing the position in 2005/06, and that the situation had improved since workshops were held by SALGA and DPLG in all municipalities to train ward councillors and ward Committees. She agreed that almost 60% of Councillors had been newly appointed, which was why SALGA had placed emphasis on their training. The initial training was intended to foster an understanding in all councillors of municipal procedures and there would definitely be further training, scheduled for this year.
Mr George added that SALGA was also training Councillors on the provisions of the MFMA, and on administration, and was trying to direct the training to ensure a better and more diverse capacitation.
Mr W Doman (DA) congratulated SALGA on a successful National Conference. He noted that SALGA had participated in workshops on the property rates, given by DPLG, as also in the District Area Finance Forums that must be further established. He asked for clarity on the distinction between the Department and SALGA, as he felt that there was the potential for overlap. He requested that SALGA and DPLG must clearly state what each wanted to achieve. SALGA sometimes seemed to participate as another municipality instead of representing local government.
Mr George noted that SALGA would be engaging with DPLG on 4 June to try to clarify the roles and responsibilities. However, in some areas the roles were articulated in the Constitution. In addition collaboration and cooperation were required in a number of areas.
Mr Doman had thought that finance was an area for the District forums, and noted that District Area Finance Forums had now been set up. He was worried about the proliferation of new forums, and wondered if it was really necessary, and whether finance should not rather remain under the Intergovernmental Relations Framework Act.
Mr Wasa indicated that the Finance forums were set up in terms of the legislation and SALGA was complying with legislative requirements.
Mr Doman asked for an indication of where SALGA was headed, and what its objectives were. The detailed plan was impressive, but he would like to be advised how it would be implemented. If SALGA wanted to establish its own personnel to deal with municipalities, and not tap into municipal resources (where this would be possible) then it would have to carry on increasing levies, and expanding its personnel. If it aimed rather to try to keep levies down then it would have a different aim and plan. He had heard that the metros were likely to each contribute around R12 million, and this meant huge funding overall for SALGA. He also indicated that SALGA had recently moved into expensive offices in Durban Road, which rather created the impression that it was boosting its own coffers while municipalities were suffering.
Mr Wasa stated that the reality was that the income of municipalities was shrinking, but SALGA had a responsibility to ensure that they were capacitated. He corrected the impression on the levies. SALGA was not charging the metros R12 million, but in fact was charging R6 million. Some municipalities had old debts that had been escalating over a number of years. In relation to the offices, he clarified that SALGA had been required to give up its old offices for RED1, and that the new offices were the most suitable it could find at short notice.
Mr Smith felt that there was lack of clarity on roles and responsibility of office bearers. He asked what SALGA would propose as a solution.
The Chairperson asked what would be the consequences of non-compliance with the reporting requirements for Annual Reports.
Mr George relied that the Public Finance Management Act was clear in setting out what the sanctions could be. He noted that SALGA had met the requirements for late submission of reporting and that no sanctions would apply to it. Reasons had to be given why the report had not been tabled on time, and this had been done.
The Chairperson noted that the Standing Committee on Public Accounts (SCOPA) had submitted a list of queries for this period. He asked if the detailed action plan that was circulated to Members was intended to address the issues arising out of the SCOPA report.
Ms Jenkins indicated that that was correct.
The Chairperson noted that the national and provincial government must support other municipalities. He asked for specific points to demonstrate that this was being done. He felt that there were several problems where provincial or national departments may not have acted in accordance with the legislative requirements.
Mr Wasa said that whoever was responsible for these interventions needed also to ensure that early warning systems were in place to detect lack of support under Section 139. SALGA was taking proactive steps to try to ensure that the support was happening.
The Chairperson indicated that it would be helpful if SALGA could in due course let the Committee have a copy of the strategic plan.
Mr George said that SALGA had just concluded a National Conference that resulted in key resolutions to take forward over the next five years. There would be a concrete plan of action and strategic plan drawn, and that would be communicated to the Committee. This plan would also look to the institutional capacity of SALGA to discharge its own responsibilities, and would decide whether the current structures were sufficient. It should be able to highlight whether SALGA had the necessary capacity, and would also look to the roles played by other bodies such as the Cities network. Internal audit capacity had already been raised in this report, and it would be further strengthened. The weaknesses that had existed in the past would be addressed so that these would not compromise SALGA's ability to perform.
The Chairperson suggested that SALGA must look to strengthening certain strategies. He indicated that sometimes municipalities would put up very onerous requirements for public usage of facilities. He mentioned, particularly in the arts fields, that some municipalities would prefer to use "big names", without requiring these people also to train younger people or promote youth. There was often a problem in the relationship between municipalities and local communities. Perhaps there was a need to create opportunities between local government and, in particular, the arts community. The voice SALGA gave to local government to deal with the communities on the ground was important.
Mr Wasa agreed that this point was important. He noted that when a municipality was procuring skills there were points allocated in relation to skills management and transfer of skills. This should address the issue of older and more well-known artists, for example, being used at the expense of the younger and newer ones.
The Chairperson asked that SALGA keep the Committee posted on issues on a regular basis. SALGA played a critical role. Its input would be as healthy as its own state of affairs and the Committee would like to see SALGA going forward in strength and capacity.
Municipal Fiscal Powers and Functions Bill (MFPFB) : Briefing by National Treasury (NT)
Mr Lungisa Fuzile, Deputy Director General: Inter Governmental Relations, National Treasury, stated that the Constitution already gave a mandate to municipalities to impose certain taxes, being property rates, surcharges on municipal service and, if authorised by national legislation, other taxes, levies and duties. The taxes it was not allowed to impose were set out. Section 229(2) of the Constitution noted that the power would have to be exercised in ways that ensured that there was no prejudice to national economic policy, economic activity across municipal boundaries, or national mobility of resources. Already, in recognition of this, the property rates were regulated by the Municipal Property Rates Act, and some other user charges and tariffs were regulated under the Municipal Finance Management Act (MFMA) and Municipal Systems Act (MSA). He stated the MFPFB was trying to complete this framework, by regulating the process by which the minister of finance, representing National Government, would allow municipalities, groups or local government to initiate taxes, and would also define the policy oversight and exercise its regulatory role.
The aim of the Bill was to ensure that municipal taxation powers were pro actively regulated, to set a framework for introducing new taxes to ensure that it fitted within the national and local government fiscal and taxation framework, and to prescribe norms and standards. The Bill was not intended to impede the municipality's ability to collect own revenue, nor did it introduce new municipal taxes. This Bill therefore sought to impose a test on the taxes before they were imposed, rather than the current situation where taxes could only be challenged after imposition, and would promote certainty.
Chapter 2 set out the way in which the municipal tax would be authorised. The Minister could authorise a tax on application by a municipality or group of municipalities, after consultation with the Minister responsible for local government, and the Financial and Fiscal Commission. The Minister would need to consult the Minister responsible for local government, organised local government and the Financial and Fiscal Commission (FFC). The tax would be authorised through regulations. The application would have to set out the policy rationale, and the extent to which it would be earmarked for particular purposes, specifying also who would be liable to pay, indicate estimated revenue, the economic revenue of such tax and the collection authority, and the consultation processes. Time limits were set out for the Minister's decision.
The regulations authorising and regulating the imposition of the tax must name the municipalities, and must determine the relevant date (which should coincide with the commencement of the financial year), the tax base and any exclusions and rates. The period of imposition of the tax could be limited, as could the purpose for which it was used. Collection would be either by the municipality authorised or another institution authorised by the Minister. Mr Fuzile noted that the Regional Services Council (RSC) levies were abolished in July 2006. Replacement allocations were made available in the interim. This was part of the equitable share for local government. A challenge lay in predicting what would be taxed in future so there were some deviations, around 5% on average. Some principles were set out as guiding principles when looking for options for replacement, namely to endeavour to maintain local government fiscal autonomy, to meet the criteria of a good tax, to approximate closely to the same incidence and to protect municipalities from fiscal shocks. Possible options were listed in a discussion document from National Treasury and included VAT zero rating of property rates, surcharges on user charges, tax sharing on national tax instruments, such as transfer duty and fuel levies, local business tax and business licence fees.
Chapter 3 dealt with the Municipal Surcharges. There was currently a distinction between the municipal base tariff, which meant the fees to cover the costs, and a municipal surcharge, which was imposed over and above those costs. Currently the surcharge was largely hidden. The future process would also take into account the cost of providing the service, the refurbishment and maintenance, but would then set a reasonable rate of return, and require the base tariff to be regulated by the regulator or Minister, with a maximum set surcharge rate, and with a tariff approved by the municipal council This was intended to demystify the pricing and achieve a more transparent pricing. The Minister would therefore be able to prescribe compulsory national norms and standards, including setting maximum surcharges and making differentiation between municipalities, types of services, levels of services, categories of users, consumption levels and geographic areas. Obligations of the municipality were set out, including the need to disclose surcharges and to have an annual review of these surcharges.
Chapter 4 prescribed for regulations to be issues by the Minister. The Minister must review those regulations every five years. It also set out that he would have to engage in a consultation process with the Minister for Local Government, relevant Members of the Executive Council of a province, the Financial and Fiscal Commission (FFC) and organised local government (SALGA). The draft regulations must also be publicised.
Transitional provisions were set out also in this Chapter, which also dealt with amendment of legislation and savings.
National Treasury did not anticipate that there would be financial implications for National Government or Provinces arising from the Bill. In addition there should not be additional financial implication for municipalities as procedures and systems were in place. However, there may be cases where the current hidden surcharges were too high and unreasonable, and which might, after due process, have to be reduced to a reasonable amount. Because they would have to undertake some technical work, there might be start up costs, but this was in any event falling within good practice.
NT had followed a full consultative process and most comments from Department of Provincial and Local Government (DPLG), South African Local Government Association (SALGA) and FFC were incorporated into the Bill submitted to cabinet. There had also been a public consultative process. Prior to the introduction of any municipal tax a detailed evaluation process would therefore have to be undertaken to ensure an appropriate balance between enhancing local government fiscal authority and accountability and implications of such new tax for taxpayers.
The Chairperson asked what timeframes were anticipated for introduction of this legislation.
Mr Fuzile responded that this was dependent upon the legislative process. As soon as the legislation had been passed it could be implemented. Implementation would be set at such a time to ensure that it did not destabilise planning of resource allocation. He stressed that there would also be a two-year window period. The Minister of Finance would be able to take measures to ensure that the income into municipalities could continue so that they would be protected.
The Chairperson asked for clarity that there was no conflict with other legislation.
Ms Jo-Ann Ferreira, Chief Director, Entities Governance Unit, NT, noted that this Bill was not inconsistent with any other legislation, and that there had been consultations with DPLG and other colleagues dealing with the MFMA in Treasury. There was no duplication elsewhere.
The Chairperson noted that a complaint had been made by SALGA that local government was often over-regulated. NT had already mentioned the possibility of constitutional challenge. This Committee was aware that the replacement of the RSC levies was not always felt to be addressing the issues correctly. He asked for comment on this issue.
The Chairperson further noted that during the budget review the National Treasury had indicated that decentralisation would happen and he wondered if in saying so it had done a good enough assessment of where the powers and functions should reside.
Mr Fuzile noted that when decentralisation occurred there was a need to ensure that there was no loss of cohesion. This regulation was intended to achieve coherence and synergy. As systems matured he could predict that many of the regulations would fall away, but at these early stages he felt that regulations were important to ensure that there was no chaos. He cited the example of some Latin American countries, which had failed to regulate the borrowing powers of municipalities, with dire results. There was a need to strike a balance.
Mr Smith asked for clarity on the distinction between tariffs, levies and taxes. He noted that surcharges were applicable only to tariffs yet surcharges were being added to rates.
Ms Ferreira noted that each of the terms had a specific meaning although they were sometimes used interchangeably. She indicated that taxes would include both levies and duties, and that duties would generally be able to show a direct benefit either to the person paying the duty or to the business environment in which he operated - customs duty being an example. She said that she would make a full list of definitions available to the Committee.
Mr Smith understood that any Municipality already imposing a surcharge would have a period of two years within which the surcharge would be reviewed. He asked whether the replacement system for the RSC levies was intended as a single new tax, to be applied uniformly, or whether it was intended to be a medium-term replacement which the municipalities could then replace with new taxes.
Mr Fuzile explained the position in regard to the levies. A discussion document had made it clear that any new systems introduced would attempt to ensure that municipalities were placed in the same, if not a better, position in terms of resource streams when the new dispensations applied. The local business tax surcharges might be charged by some municipalities while others might opt for transfer duty increases. It was not a question of finding one tax to replace another but rather to try to ensure that they would be in the same position. Hindsight was an exact science and although an attempt had been made to reach the same position, this had not always happened. The difference between the grant and the RSC levies had been calculated using quite a complex formula, which had estimated the levies, taken an average over three years, added an inflation factor and had also taken into account the zero-VAT rating on property rates. This allocation was discussed with representatives of municipalities at a budget forum and was the best estimate possible that was reached in a transparent way. The RSC levy income was used as a base for each individual municipality. The budget forum would provide an avenue still for municipalities who felt that they were being prejudiced to raise the matter again.
Mr Smith asked if the current proposals by eThekwini Municipality to raise the rates and electricity charges were legal
Mr Fuzile indicated that he would not like to attempt to answer this question as he was not aware of the situation.
Mr Doman noted that the municipal base tariff already included a reasonable rate of return, whilst surcharges allowed for further leeway. He asked if municipalities who were already imposing certain taxes could continue to do so, and if there was any sanction to municipalities who were not being reasonable.
Mr Fuzile noted that there would be a period of two years during which all existing rates would be tested to see if they were in line. If they failed to meet the requirements then they would have to be restructured or abolished. Once the process became more transparent it would be easier to see whether the taxes had a good basis.
Mr Mshudulu indicated that discussions around the MFMA had already raised the issue of which Minister should have the power in respect of municipal finance matters. He asked whether it was not possible that there could be room for misinterpretation on the accountability lines.
Mr Fuzile stated that the Constitution assigned different responsibilities to different organs of state. The requirement for consultation between the Ministers would ensure that critical stakeholders were not left out of the process. The two Ministers were specifically named and in practice there would be no risk of one Minister not cooperating with the other or having a different agenda. Even the regulations would require the agreement of both. This was a practical way of dealing with fiscal policy considerations. This was essentially a money bill and therefore must reside under the Minister of Finance.
Mr Mshudulu noted that in the current environment many of the smaller municipalities experienced problems in financial management. He asked what practical challenges would be addressed by this Bill, noting that property rates were also still posing a challenge, and suggested that there should be an attempt to make it user-friendly.
Mr Mshudulu added that it was easy to collect money, but ensuring that it was distributed to meet the proper objectives was more of a challenge. He asked if local government alignment of financial years, budgets and IDP processes would be possible, or whether it was intended to have a phased-in approach.
Mr Fuzile responded that it was clear that capacity in the municipalities varied. He agreed that it would be useful sometimes to have joint sittings of this Committee and the Finance Portfolio Committee to clarify the roles of National Treasury. MFMA and the intergovernmental fiscal transfer provisions both recognised the variation in municipal capacity. At the same time South Africa could not move at the pace of the slowest municipality. It was anticipated that those municipalities with more resources would be likely to move first and, through their applications, show up any difficulties in the process that could then be used to inform the smaller and less resourced municipalities. The larger municipalities were more likely to propose new taxes and it must be noted that not all the municipalities would necessarily wish to do so. There was also provision for exemption from certain requirements in certain cases. It was necessary to review taxes annually in any event for the purposes of proper budgeting.
Mr Nonkonyana noted the provisions of Section 229 of the Constitution. He asked whether there had been something specific that had indicated that there was a need for this legislation. The principles were clear and he had no problems with them but would like to hear more on the principles behind it.
Mr Nonkonyana said that he would like some clarity on whether all legislation having a financial implication was automatically to be administered by the Minister of Finance. He asked whether, for instance, the Minister of Police would need to administer a plan that had something to do with policing.
Mr Fuzile said that in order to answer this question it was necessary to look at the responsibilities of National Government, as exercised through the Minister of Finance, in relation to macro-economic policy. The most crucial aspects of such policy related to inflation, taxes and government expenditure. Inflation targeting had been established a few years ago, in an attempt to curb inflation. If some of the decisions impacting upon inflation, such as imposition of municipal taxes, fell outside the realm of National Government then this would make it impossible for National Government to achieve its targets of controlling inflation. Some of the surcharges on municipal services had in fact tended to be out of step with the macro economic objectives.
Mr Fuzile gave a hypothetical example of a municipality that might put a 100% surcharge on electricity. Electricity comprised a large part of the production costs of industry, and therefore industry could clearly not meet its targets to keep the costs of doing business down. He pointed out that the drafters of the Constitution had the foresight to say that if the responsibility had been assigned to one organ of State then there needed to be some leverage to implement its decisions elsewhere.
Mr Nonkonyana said that he took the point, but still believed that the application of Section 229 was both clear and contained the necessary protection by requiring that any levies should not cause material and unreasonable prejudice. He was still not persuaded of the need to have this Bill but would discuss the issue further outside this meeting.
Mr Smith indicated that he could understand the reason for surcharges. He asked for examples of situations where a district and local municipality might want to impose conflicting levies.
Ms Wendy Fanoe, Director, Local Government, NT, indicated that this could arise if, for instance, a local municipality might impose residential rates and a district municipality business rates. In practice, rates allocation was permitted only for category A and B municipalities, but if there was not such a distinction then the example she gave could apply.
Mr M Johnson (ANC) asked whether Government had a commitment to support municipalities or was likely to require them to self-fund
Mr Fuzile stated that it was in the interests of National Government to continue to support municipalities.
Mr Johnson asked what impact this legislation would have on the Municipal Systems Act
Mr Fuzile confirmed that there were no conflicts with this Act and that certain sections of this Act had been highlighted in the presentation.
The Chairperson thanked the presenters and indicated that this Committee might confer with other Portfolio committees, including the Portfolio Committee on Finance
The meeting was adjourned.
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