Intergovernmental Fiscal Review: Local Government

NCOP Finance

17 October 2001
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FINANCE SELECT COMMITTEE AND SELECT COMMITTEE ON LOCAL GOVERNMENTAL AND ADMINISTRATION

FINANCE SELECT COMMITTEE; LOCAL GOVERNMENT & ADMINISTRATION SELECT COMMITTEES: JOINT MEETING
18 October 2001
INTERGOVERNMENTAL FISCAL REVIEW: LOCAL GOVERNMENT

Chairperson:
Ms D Mahlangu

Documents handed out:
Intergovernmental Fiscal Review 2001 [Chapter 8 - 11]
National Treasury Presentation on Local Government and the IGFR
Briefing by Minister of Water Affairs (Appendix 1)
SALGA Presentation (Appendix 2)

SUMMARY
Local government is the tier of government that is tasked with the most delivery. As such, the resources available to it should be adequate to enable local government to execute its mandate. Provinces generally felt that the division of revenue in terms of local government for the next financial year did not reflect the needs of local government.

MINUTES
Input from Minister of Water Affairs
Mr Ronnie Kasrils, Minister of Water Affairs stressed that his department was dynamically linked to local government. Areas such as conservation, forestry and irrigation farming were essential to rural development, and these functions must be jointly co-ordinated between local government and the Department of Water Affairs. He was pleased to announce that Treasury had approved R1 billion towards the rural water supply programme that focused on water supply and sanitation. He said that R100 million had been allocated per year to the sanitation programme in the form of conditional grants to local government.

He noted that 55% of people at local government level are served by the free water programme and he suggested that wealthier municipalities should cross-subsidise poorer municipalities. Another option would be for National Treasury to offer conditional grants to municipalities through the equitable share. He stated, however, that unless local government is financially prudent and sound, National Treasury would be wasting its money if it continued to offer money.

Mr Kasrils stated his concern over the fact that the focus of the Intergovernmental Fiscal Review was on urban municipalities and not on rural municipalities where the need is the greatest. He said that in rural areas, revenue generation potential is low and institutions are weak and therefore they needed more help from the division of revenue. He also highlighted the confusion arising as to the role of municipalities and district councils.

He said that at times the Division of Revenue Act was an impeding factor for delivery but he said that Section 29 of the Act grants exemption from following the act in extenuating circumstances.

Input from National Treasury
Mr T Pillay highlighted the fact that local government has more revenue-raising capacity than provincial government. He however stated that lack of data in many instances prevented the National Treasury from implementing appropriate programmes. He stressed the need for uniformity in municipality financial practices so that budgets can be comparable.

Discussion
Mr Kwiti, the Eastern Cape Local Government MEC, said that certain municipalities do not have the capacity to execute their functions both in terms of infrastructure and in terms of human resources. He said that the biggest challenge facing municipalities in the Eastern Cape was the maintenance of infrastructure.

Mr Maswanganyi, the Northern Province Local Government MEC, raised the problem that local government gets a paltry portion of the national budget allocation. He said that the lack of revenue raising capacity of provinces impacts on their sustainability and hence on the sustainability of local government. He said that many relatively new municipalities still need institutional support especially in terms of personnel institutional grants, and such grants should be increased.

Mr Kwiti (Eastern Cape) pointed out that the merger of new municipalities results in additional staffing who are redundant and therefore pending retrenchments arise. He said that the percentage allocated to skills development and training is very minimal. He also highlighted the fact that some municipalities have emerged with huge debt to the Department of Water Affairs and he recommended that this debt be written off.

Mr Kasrils answered that the National Treasury is the only department empowered to write off debt, but in any case this would set a bad precedent on the part of government.

Mr Ngwenya (Gauteng) said that politicians and officials should work coherently so that delivery can take place faster. He said cross-boundary municipalities have to deal with their problems, as there was confusion in the areas of assets and liabilities. He pointed out that revenue raising is urban-based and hence peri-urban and rural areas were being disadvantaged.

Mr Bhamjee (KwaZulu Natal ) said that many municipalities and four district councils in KZN have no infrastructure whatsoever and he wanted to know the level of assistance on the part of provincial and national government.

Mr Donald (Northern Province ) emphasised that the issue of traditional leaders needs to be finalised so that effective delivery can take place. He said that transitional grants would not be sustainable in the long run.

Mr Kgalane (Gauteng) said that people who had defaulted on payments in Soweto had their taps disconnected. He said that councils expect reconnection fees to be paid and he wondered how this is possible since people cannot even pay the fees for the use of water.

Mr Ngwenya (Gauteng) asked about the role of provincial departments in supporting local government.

Mr Masimula (SALGA) asked if Treasury was looking at empowering provincial governments financially in order for them to fulfill their constitutional mandates.

Mr Kasrils explained that a special Cabinet Committee on the Role of Traditional Authorities has been established.

Due to time constraints, the Chairperson had to adjourn the meeting.

Appendix 1
BRIEFING BY MR RONNIE KASRILS, MP,
MINISTER OF WATER AFFAIRS AND FORESTRY FOR NCOP HEARINGS
ON INTERGOVERNMENTAL FISCAL REVIEW

18 October 2001

I am
pleased to have the opportunity to meet with representatives from both houses of Parliament as well as from SALGA to focus on a matter of particular concern to me and my Department, the Inter-Governmental Fiscal Review.

Some of you may think that, because water is a national competence, the Department of Water Affairs and Forestry is not interested in inter-Governmental issues.
Those present who are or have been members of our MINMEC will know that is not the case. Many of the issues we deal with, the areas in which we work, involve both provincial and local government.

Here I can highlight:
· waste management and control over water pollution;
· support to irrigation farming;
· conservation forestry;
· even the Department's famous Working for Water Programme is essentially a focused nature
conservation programme and, as we all know, nature conservation is a concurrent function with the
Provinces.

Most immediately important however are:
· water supply; and
· sanitation service provision,

and it is these that I want to focus on this afternoon because they are functions address the basic needs of all our people, particularly the poorest.

If you read the 1994 White Paper on Water Supply and Sanitation, you will see that the position was made very clear even then that local government would be the supplier of water and that the role of national government was to provide the support to enable them to do the job.
This is why, since as early as 1997, the water supply and sanitation activities of my Department have been formally designed as a programme of local government support.

The way in which we support local government is by:
· Providing funds for basic needs water schemes.
· Operating water and sanitation schemes where local government is not yet willing or able to take
them over.
· Establishing a family of regional utilities, water boards, or, as the new municipal legislation would call
them "multi-jurisdictional service providers" to provide services where local government does not want
to provide the service itself.
· Training and capacity building for local government at the levels of councillor, official and technician
and artisan.

Since so much of our work involves supporting another sphere of government to execute its responsibilities, it should therefore be obvious that inter-Governmental fiscal matters are of great interest to us.

It is for that reason that we have always sought to participate actively in the process of developing policy and ensuring that it is effectively implemented.

Unless we ensure that local government is financially sound and able to perform its functions, I would be wasting our money by my efforts to persuade Treasury to increase the allocation for our basic needs infrastructure programme. And here I must express my appreciation for the fact that this year we have again been allocated over one billion rand for our capital programme.

But there is no point building reservoirs, putting pipes in the ground if there is no money to pay for the electricity to turn the pumps and make the water come out of the taps. And that means we have to get involved in and understand local government's financial arrangements.

That is why, as I said, we engage actively in the policy development and review processes.

The first thing I have to say about this is that I don't think that we always realise the size of the challenges that we are tackling.

What my colleague Sydney Mufamadi, Minister of Provincial and Local Government, has done, in his own quiet way, completely restructuring the local tier of government is nothing short of revolutionary. It is a huge task, one which many richer countries continue to struggle with. Even where I used to live in London, in the UK, they are still trying to agree on an appropriate system and to divide the powers and functions effectively.

We will only be successful in achieving the effective nation-wide system of local government that we want if we acknowledge the size of the task and focus our energies on tackling it. We must also be prepared to be honest and frank in our analysis of the situation, the problems and challenge, the successes and the mistakes. If we do not engage in review and self-criticism, if we are too quick to claim easy victories, we will fail.


I am acutely aware of the issues because the flagship community water supply and sanitation programme is facing problems directly related to the implementation of the inter-Governmental fiscal system. In the spirit of the ANC, which guides this Government, I have not hidden these problems. In fact I told the local government MECs and repeated to the media at my Parliamentary briefing, that spending on our programme was running too slowly, in part because of problems related to the way in which we are rolling out the system.

But I will come back to these problems.

First, I want to turn to the document presented by National Treasury.

I am going to base my comments on those already made by my Department when they were presented with the draft. Some of their comments were incorporated, for which we are grateful, some not.

So when we saw the draft, we suggested that:

'A key comment is that the document by its nature focuses on the areas of greatest expenditure. This may perversely have the effect of ignoring certain key strategic areas of particular policy importance to government due to their implications for social transformation and the eradication of poverty."

Talking specifically about local government, we noted that:

'In general, it is striking that the focus of the review is on the urban municipalities (where the bulk of expenditure occurs) rather than on the rural and district system (where the major challenges of service delivery and poverty eradication are located). It would appear that this is due to the absence of coherent data from the latter sector but this reflects the need for greater rather than lesser focus on these areas. If this is not done, the effectiveness of the fiscal review as an instrument to assist Government in achieving its transformational and equity goals will be seriously weakened.,,

I am pleased to note that this is reflected in the conclusion of Chapter 9 which promises that the next Review will focus on the affairs of the newly demarcated municipalities when more data is available.

This highlights our concern, also now reflected in the review (Chapter 8), that
'The challenge of establishing effective local government in the rural areas where the majority of South Africa's poor still live cannot be overstated. In these areas, revenue generation potential is low, institutions are weak and service provision is generally both more complex and more costly as a result of the absence of formally planned settlements."

The funding available to municipalities serving such communities is limited and does not adequately cover their basic administrative requirements. As a result, funding intended for specific purposes, such as the local government equitable share, is often used for other purposes. During the current year; these municipalities have also been particularly seriously affected by uncertainties about the mechanisms for the allocation of the equitable share. This situation is under review at Ministerial level"

Treasury has also correctly focused on the fact that the introduction of the free basic services policy will only be effective if the mechanisms by which local government is supposed to pay for these services are clear - because as we all know, very little is free in this world and someone will have to pay for free services.


We also need to focus on the fact that if, as we plan, we are to transfer the water services run by my Department pretty much on a shoe string, we have to recognise that these are substantial businesses. Local government will have to be re-capitalised if they to run the services successfully and introduce the improvements that their citizens hope and expect.


One thing that does concern me about the Review is that, while it focuses on the need to support local government, it does not extend that brief far enough. It is the job of all of us at national level to support local government, not just Minister Mufamadi's Department. In energy, transport, public works, health, environment and water .... the list could go on, local government will be effective if we support it to become effective.


We must realise that we are all part of the support system. This means that we must design not just our individual departmental programmes but also inter-Departmental mechanisms (such as the Integrated Strategic Rural Development Programme) as well as financial mechanisms (such as the conditional grant system) to provide coherent support.

This is a very practical problem for me.

As some of you may know, my Director-General, Mr Mike Muller, earlier this year warned about the dangers that the Division of Revenue Act could cause problems in the implementation of our water supply programme.

While we fully support the objective that local government should promote and take responsibility for service provision projects in their area of jurisdiction, we must recognise the limits of capacity, the confusions that still exist over the roles and responsibilities of B and C municipalities, as well as about the division of funds between them.

We were concerned that these matters, as well as the fact that administrations have not yet been fully merged, do not yet have Integrated Development Plans, meant that we should not be too hasty in insisting on detailed compliance with a set of procedures that make sense but require capacity.

I have in fact told my Director General that, if it is necessary to break the law to implement our water programmes, then he must do so. He has said that it has not yet got to that stage, that if Treasury grants the necessary exemptions, we will be able to proceed within the framework of the Division of Revenue Act.

This experience highlights the need for us to be practical as well as to be bold, to be ambitious but also to be measured in our approach. Mr Chairman, ladies and gentlemen, I hope this has given you some sense of approach to and concerns about the current state of inter-governmental fiscal relations.
I want to end by commending National Treasury for producing such a detailed and incisive review - for unless it had raised the issues I have addressed, I could not have taken them further. I must also congratulate the Committees for promoting this invaluable opportunity for us to come together and discuss what remains one of our great challenges and successes, the backbone of Minister Mufamadi's remarkable new system of local government which, in time to come, will I believe come to be seen as one of the most important achievements of our new democracy.

Appendix 2:
SALGA PRESENTATION TO THE SELECT COMMITTEE ON THE INTERGOVERNMENTAL FISCAL REVIEW:
OCTOBER 18,2001

Honourable Chairperson
Honourable Minister for Provincial and Local Government
MECs for Local Government
Honourable Members, and
Special Delegates

1. INTRODUCTION
The South African Local Government Association (SALGA), a statutory body broadly mandated to represent and resource local government on a national, regional and international level, welcomes this opportunity to present our views in this committee. We do this in the sprit of strengthening the notion of cooperative governance, in that we share a joint responsibility to improve the lives of all South Africans.

This is the first Intergovernmental Fiscal Review, after the immense changes to the system of local government and the elections of December 2000. While you have interacted with SALGA in the past Reviews, our presentation today represents the view of the new system of local government and the new leadership of SALGA, elected after the December 2000 local government elections.

I want to take this opportunity to share with you some of the priorities identified by SALGA:
· We are in the process of restructuring SALGA to be more responsive to the needs and challenges faced by municipalities throughout the country
· We recognise the importance of the broader intergovernmental relations, and are determined to play a constructive role in forums such as the Budget Forum, our engagement with Provinces and national departments; and
· Given the significant fiscal and financial challenges faced by municipalities, we constantly endeavour
to assist our members municipalities to address these challenges in an attempt to improve the
services that local government provides to our people. This includes a dedicated programme to build
the capacity of newly established District Councils.

Chairperson, our specific objectives include:
· The development of capacity in local government, especially with enhancing the role of councillors.
· Acting as a resource for local government, e.g. in legislative, technical, strategic and other relevant
areas.
· Acting as an employer organisation for the local government sector
· Representing local government in all policy, legislative, consultative and executive processes
affecting local government, such as we are doing today.

· Representing South African local government internationally, with an emphasis towards learning as much as possible from best practice examples in the World.

In this period of remarkable change in the Local Government Sector, SALGA is determined to contribute towards establishing local government that is innovative, vibrant, dynamic and able to rise to the challenges it faces. We are mindful that this task is not an easy one, and are willing to put every effort into making sure that we succeed.

2. BACKGROUND
"The new structure of local government in urban and rural areas, will be the focal institution of government to ensure the coordinated implementation of our programmes.' (President Thabo Mbeki address to Parliament on the 9 February 2001.) It is clear that the failure of local government to discharge its mandate will reflect negative on the whole government.
The final phase of the Local Government Transition has substantially changed the institutional character of municipalities, through the redemarcation of municipal boundaries and the new structural form introduced by the Municipal Structures Act.
The Municipal Systems Act has introduced operational changes, and parallel to that, the financial systems of local government will be reformed through the introduction of the Municipal Finance Management Bill, Budget Reforms Project and the introduction of the Generally Accepted Municipal Accounting Practice policy framework.
The principles of good governance1 effective and efficient management and cost efficiency are also critical for a successful local government.

3. KEY PRESSURES AND PRIORITIES
The local government transition and transformation has increased the fiscal and financial pressures faced by local government in general. The December 2000 elections have introduced a range of challenges faced by municipalities. These include:
· The costs of establishing new municipal structures and systems as a result of the
demarcation and new legislation;
· The provision of free basic water and electricity;
· The responsibility to address the poverty and the developmental challenges faced by local
communities;
· Addressing the legacy of Apartheid, and
· Increasing participation and accountability in local governance.

The challenges faced by local government are enormous, and our presentation is made against this background, and in the sprit of fostering cooperative governance.

4. PRINCIPLES FOR LOCAL GOVERNMENTAL FINANCING
1.The IDPs are the most powerful participative and consultative instrument to formulate development priorities at the local level. To strengthen the link between community needs and spending priorities, SALGA believes that the IDPs should inform National and Provincial government's spending priorities.

2.The metropolitan municipalities generate 80% of the GDP of the country. Accordingly the vital to the
national economy. Due cognisance must therefore be taken to ensure that the infrastructure and
services is conducive to stimulating economic growth, development and job opportunities in these
areas. The financial stability of the metros is therefore critical to national welfare of the economy.

3.That this Review takes into account the enormous fiscal burden that the financing of free basic
services has on local government. SALGA believes that a dedicated source of funding be identified to
finance the provision of these services.

4.That SALGA supports the concept of cross subsidization in tariffs, including a life-line tariff for some
of the services, especially water subject to affordability and the cost of services constraints.

5.A national study with regard to the subsidization of the poor over and above the concept of free
basic services for all, be undertaken within all municipalities to determine the extent thereof.

6.Local Government cannot ignore its key responsibility of social and economic development at the
local level. While a significant amount of these costs are funded through local taxes, a vast number of
municipalities do not have adequate tax bases to address these challenges. SALGA is of the view
that an alternate source of revenue be identified to finance the gaps in social and economic
development.

7.With reference to local government conditional grants, it is important that the Division of Revenue
Act make provision for grants to local government to be transparent and municipalities must have
access to and be informed on the fiscal framework which amongst others will include:
· Rationale behind the grant framework.
· The amount dedicated for a particular function in Local Government.
· The implementation programme and time table for spending.
· Conditionalities associated with the grants.
· National and provincial accounting procedures.

8. SALGA acknowledges the work by the National treasury and supports the rationalisation of
conditional grants to local government and the proposed three year allocations of grants to
municipalities.

9. SALGA supports the National Treasury Medium Term Expenditure Framework in order to effect proper planning of municipal services.

10. While the role of Central and Provincial Government in financing new infrastructure is
acknowledged, the maintenance thereof in future years will create a major additional burden for local
government, and will further constrain the limited resources of local government. Accordingly
mechanisms must be considered to ensure the sustainability and maintenance of these facilities.

11. District municipalities are reliant on RSC levies to finance their operating cost. It is therefore
important to retain RSC levies as general income source for District Councils.

12. The equitable share must be increased to make provision for allocation to District municipalities

5.CONCLUSION
Chairperson I thank you for this opportunity to address this committee. In conclusion, I want to reiterate that the constitutional principal of cooperative governance is critical in improving the lives of all our people. In this regard, we believe that effective intergovernmental communication and cooperative budgeting is essential.

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