Financial and Fiscal Commission Recommendations on 2009/2010 Division of Revenue: Housing, Transport and Provincial and Local Government

NCOP Finance

17 June 2008
Chairperson: Mr T Ralane (ANC, Free State)
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Meeting Summary

The Financial and Fiscal Commission (FFC) had made recommendations concerning roads, transport, housing, health care, electricity generation, distribution and pricing and the augmentation of local government revenue to the Departments of Provincial and Local Government, Housing and Transport.  Representatives from the three national Departments briefed the Committee on the respective Departments’ responses to the FFC’s recommendations.

Members asked questions about the classification of roads, the responsibility for road maintenance, the taxation of businesses by municipalities, the priorities of municipalities when applying revenues, the inability of poor municipalities to raise sufficient funding, the justification for the existence of district municipalities with no responsibility for service delivery, the prudence of municipalities when determining property rates taxes, the ability of municipalities to budget for electricity tariff increases, the ability of municipalities to deliver housing services, the accreditation of municipalities, the vandalism of houses prior to occupation, the resistance of provinces to transfer roads to the South African National Roads Agency Limited (SANRAL), the development of rail transport services, the provision of learner transport to schools and the provision of public transport services.

Meeting report

Briefing by Department of Provincial and Local Government (DPLG)
Mr M Manyike (Executive Manager, DPLG) briefed the Committee on the Department’s response to the recommendations made by the Financial and Fiscal Commission (FFC) (see attached document).

The presentation focused on the FFC’s recommendations and the DPLG’s comments on the 2010 FIFA World Cup transport infrastructure, inter-governmental data issues, the road classification framework, augmenting local government revenue, electricity pricing, generation and distribution, bottlenecks hampering housing delivery and the financing of health care.

The DPLG expressed appreciation for the work done by the FFC but was concerned over the ability of certain poor municipalities to generate sufficient revenue to attain fiscal autonomy.

The Chairperson noted that the DPLG and FFC agreed with the Committee’s own view that the non-implementation of the road classification framework was a stumbling block in determining new road infrastructure and the maintenance requirements of the existing roads.

Mr D Botha (ANC, Limpopo) remarked that the matter of the road classifications had remained unresolved for five years and provinces were unable to confirm which roads belonged to them.

The Chairperson suggested that the question was referred to the Department of Transport (DOT).  He invited Members to table questions on the recommendations regarding the augmentation of local government revenue (pages 6 – 8 of the attached document).

Mr Botha cautioned against over-taxing businesses as such measures would result in businesses being closed down.  He said that businesses were already subjected to many taxes, including the property taxes, which replaced the Regional Services Council (RSC) levies.  Excessive taxation of businesses will result in more poverty and unemployment as a result of retrenchments.  He said that between 40% and 50% of district municipality budgets were being spent on salaries and significant amounts were spent on constructing office buildings, with the result that municipalities received little or no support from the district municipality.

Mr E Sogoni (ANC, Gauteng) agreed with Mr Botha’s comments.  He understood the rationale behind the FFC’s recommendations but was concerned over the implementation of the recommendations.  He said that the ability to raise funds differed between municipalities and the poorer municipalities were unable to generate revenue from non-existing businesses.  He said that it was important to note that there were exceptions and that one rule cannot be applied to all the municipalities.

Mr M Robertson (ANC, Eastern Cape) appreciated the dilemma of allowing municipalities to augment their revenues but expressed concern over the ability of certain municipalities to act prudently when prioritising the spending of available funds.  He cited the example of a certain municipality that applied for additional funding to construct an office block instead of providing the necessary infrastructure to supply clean drinking water to the population in spite of deaths occurring in the area as a result of drinking contaminated water.

Ms A Mchunu (IFP, KwaZulu Natal) remarked that many poor, rural municipalities only had game reserves as a source of income and were unable to raise revenues from agricultural activities because of drought.  She suggested that the demarcation of municipal boundaries was reconsidered.

Mr Z Kolweni (ANC, North-West) referred to the DPLG’s comments to the FFC recommendations on augmenting local government revenue.  Although the comments accurately reflected the situation poor rural municipalities found themselves in, he found no proposed solutions in the recommendations and comments provided in the briefing.

Mr Botha asked if district municipalities still needed to exist since they no longer collected the RSC levies.  He asked why funding cannot be provided directly to the municipalities instead of remaining in the district municipalities’ accounts.  He said that the district municipalities employed qualified personnel but the municipalities were able to employ their own staff.  He asked if the DPLG was reviewing the rationale behind the existence of district municipalities.

Mr Sogoni agreed with Mr Botha’s comments.  He referred to the DPLG’s comment on the FFC recommendation that a new local business tax accrue to district municipalities.  The DPLG pointed out that some district municipalities had no service delivery responsibilities and therefore no direct accountability to businesses.  He was aware that there was some disparity between district municipalities and asked how many district municipalities there were with no service delivery responsibilities.

The Chairperson said that although the functions of district and local municipalities were clearly assigned, the problem was the reality of implementing those functions.  There was a degree of tension between the district and local municipalities.  District municipalities employed technical personnel but the local municipalities had no technical staff.  The FFC recommended that district municipalities were allowed to raise funds but conditional grants were not being transferred to the local municipalities.  Issues raised concerned governance and the powers assigned to municipalities.  The DPLG had raised serious issues and the question was how these may be resolved.  He was concerned that the implementation of the recommendations may create problems for municipalities with low capacity.  He noted that certain district municipalities were implementing projects that did not involve the local municipalities.

Ms V Mafoko (Senior Manager, DPLG) advised that a review of the white paper was underway and one of the criteria was the ability of district municipalities to add value in terms of service delivery.  Certain district municipalities were responsible for providing water and sanitation facilities but others did not have the capacity and entered into service level agreements with other entities.

In response to the questions about over-taxing businesses, Ms Mafoko replied that the FFC conducted surveys but district and local municipalities responded differently to the issues related to enhancing existing taxation and tapping into tax revenues.  With regard to local government property rates, the DPLG was concerned over whether municipalities applied the ratings in a responsible manner.  There were instances where important sectors were either over-rated or not rated at all.  The DPLG cautioned against the irresponsible rating of property rates taxes as such measures will affect the economy.  She said that there was a need to consider all the taxes paid by a particular sector and the issue of affordability when considering introducing a new tax.

Ms Mafoko said that the DPLG was unable to propose any particular recommendations to replace the RSC levies but were aware of discussion currently being held within National Treasury in this regard.

Mr Manyike advised that 26 out of the 46 district municipalities did not have service delivery responsibilities.  He said that the Minister of Finance announced in his budget speech that consideration was being given to apportion a part of the fuel tax levy to provinces and local government as a short-term solution to replace the RSC levies.  The matter was being discussed between the DPLG and National Treasury.  In the longer term, consideration was given to replacement grant funding.

Mr Manyike said that the DPLG initiated public debate on the issue of the existence of district municipalities.  He said that the demarcation of municipal boundaries and the powers and functions assigned to district municipalities formed part of the debate.  The consequences of demarcation of boundaries required careful consideration, for example certain municipalities entered into long term borrowing agreements with the capital market and it was necessary to take account of possible future implications for the municipalities concerned.

The Chairperson suggested that the demarcation issue was not discussed in too much detail at this hearing.  He said that the fact that district municipality councilors were not directly appointed by the electorate raised the issue of the district municipality’s mandate.  He asked what incentives existed for businesses to remain in a municipality.

Mr Botha mentioned that certain district municipalities appointed consultants to collect the RSC levies and paid 20 to 30% of the collected levies in commission to the consultants.  He asked whether the district municipalities will have the capacity to collect the taxes when they were given the power to do so.

Mr B Setai (Chairperson, FFC) said that the FFC recommendations stated that any taxes levied by municipalities must enhance the fiscal autonomy of the municipality.  Criteria must be applied to ensure that the taxes remained buoyant and did not result in businesses being squeezed out.

The Chairperson said that certain district municipalities had a ‘big brother’ approach to the small local municipalities and asked how such a scenario would be dealt with.

Mr Setai remarked that the discussions focused on the comments rather than on the recommendations made by the FFC.

The Chairperson replied that the laws were clear but consideration was being given to the unintended consequences of implementing the laws.  The cautions and concerns that were raised by the DPLG resulted from discussions held and the unforeseen problems experienced with the implementation of the laws.

Mr B Khumalo (Deputy Chairperson, FFC) said that the FFC recommendations must be seen in the context of replacing the RSC levies with alternative revenue sources available to municipalities.  The Municipal Fiscal Powers and Functions Act (MFPFA) was the enabling legislation to create the environment that allowed municipalities to raise funds by means of taxation.  A tax that resulted in negative economic effects was not allowed.  If a municipality was given the power to raise taxes, it must also be allowed the power to apply the funds generated.  The misapplication of funds by irresponsible municipalities was only possible if the regulatory environment was weak.

Mr Khumalo said that the FFC recommendation was clear on the need to replace the RFC levy with alternative sources of revenue.  The proposal to utilise the fuel levy or any other recommendation to raise taxes by DPLG or National Treasury would also be subjected to the four criteria in the MFPFA.  It was possible that a municipality may not qualify to raise a tax if the potential outcomes were too negative.

On the issue of the irresponsible property rates levied by municipalities, Mr Khumalo asked what regulations were in place to govern the implementation of the Municipal Property Rates Act.

The Chairperson remarked that there was a problem with municipalities that paid excessive allowances to councilors.  Although guidelines existed, municipalities with the power to levy taxes tended to attempt to raise additional funds in order to pay themselves higher salaries.  Questions were raised about the priorities of municipalities when applying tax revenue.  He said that punitive taxes resulted in a fear of government.

Mr Robertson said that the MFPFA was not adhered to by municipalities.  There were municipalities that spent 32% to 57% of their budgets on salaries.  Municipalities failed to appoint staff to vacant posts because there were insufficient funds available to pay the additional salaries.  He said that municipalities ignored the MFPFA with impunity.

Mr Sogoni said that consideration must be given to the implications when laws were passed.  He cited the Municipal Property Rates Act as an example and asked how the rates can be levied in very poor areas where people were struggling to pay for food.

Ms Mchunu suggested that the scrapping off the RSC levies was reconsidered.  She said that many poor municipalities with no tax base were serviced by the RSC levies raised by district municipalities.

Mr Khumalo asked what provision was made in the legislation for non-compliance by municipalities.  He agreed that raising taxes was not a feasible option in some poor rural municipalities and this underscored the need for a review of the fiscal framework of municipalities.  Where there was no economic activity, it may be necessary to make provision for grants to the municipality concerned.  The proposal was that the RSC levies were replaced in part by grants and it may be necessary that the grants were continued.  In any event, the fuel levy will benefit only a few municipalities.

Mr Khumalo pointed out that the FFC recommended in 2002 that local government was not penalised by the scrapping of the RSC levies.  Subsequent discussions were on the possible sources of revenue to replace the levies.  The South African Local Government Agency (SALGA) compiled a report on the comments and concerns raised by municipalities.  The FFC continued to discuss the issues raised with SALGA to determine where the future focus needed to be.

Mr V Makinta (Director, National Treasury) said that the interpretation of the FFC’s recommendations were of interest to National Treasury.  He said that the issue of the service delivery responsibilities of district municipalities required further discussion.  Attention needed to be paid to the qualifying criteria before a tax was levied as well.

The Chairperson requested comments on the recommendations regarding electricity generation, distribution and pricing.

Mr Sogoni noted that the formation of the Regional Electricity Distributors (RED) was already agreed to.  He asked how much consultation took place with local governments.  The DPLG appeared to have some reservations about the RED’s and he asked for clarity on the views held by the DPLG.

The Chairperson said that the comment made by the DPLG that municipalities were unable to accommodate increases to tariffs in their budgets raised a critical issue.  The lack of clarity on future electricity increases created uncertainty as municipalities were unable to determine if they could afford the increased tariffs.  Such uncertainty affected the credibility of municipal budgets and increased the risk of municipal sustainability.

Mr Botha said that municipalities budgeted for increases in electricity tariffs in line with inflation, e.g. 10%.  He said that the threat to the credibility of municipal budgets and the inability to implement tariff increases within a short period of time were problematic.

Mr M Goeieman (ANC, Northern Cape) requested clarity on the FFC recommendation regarding the potential loss of revenue to municipalities as a result of the RED’s.  He asked what the FFC recommended concerning the comments raised by the DPLG on multiple tariff increases by Eskom and the additional costs incurred by municipalities to curb demand.

Mr Manyike explained that the DPLG’s concern about the RED’s centered on the implementation of the RED’s   He said that the concept of RED’s dated from 1993 but earlier Cabinet decisions were subsequently reversed.

The Chairperson advised that the issues concerning housing delivery will be dealt with following the presentation by the Department of Housing.  He said that the financing of health care by provincial and local government was an ongoing issue.  He said that continued consultation between the DPLG and the FFC was imperative.

Briefing by Department of Housing (DOH)
Mr M Dlabantu (Chief Financial Officer, DOH) briefed the Committee on the Department’s response to the FFC’s findings (see attached document).

Issues raised by the FFC included the lack of budget data and reports on the grant framework performance measures by provincial housing departments.

Not all provinces complied with the DORA requirements and where serious problems occurred, the Department withheld funds.  Such measures however punished the poor rather than the municipality involved.  The Department’s approach was to provide assistance where problems occurred.

The Chairperson noted the concerns raised by the FFC over the readiness of municipalities to deliver services.  There appeared to be a need for audits on the service delivery capabilities of municipalities.  He said that the Steve Tshwete Municipality was not accredited but claimed to have sufficient funding for and was confident of its ability to deliver housing delivery.  He noted that in the Northern Cape, district municipalities received the funding for housing development projects rather than the local municipalities.  He said there appeared to be a need to re-assess municipal capacity to deliver housing requirements.

Mr Dlabantu noted the comments made by the Chairperson.  He explained that any municipality may apply for accreditation.  He said that it was necessary to complete an assessment of the institution’s risk of failure.  He undertook to investigate the situation at the Steve Tshwete Municipality.

Mr Makinta remarked that there were concerns over the accreditation process, the inferior engineering standards applied to housing for the poor and the issue of integration in the areas marked for development.

Mr Dlabantu replied that the DOH had identified some of the larger municipalities to receive direct funding for housing projects.  Currently, funding was provided at the national and provincial level and municipalities acted as service providers.  However, the process entailed too much bureaucracy and resulted in delays.

Mr Dlabantu advised that provincial capacity assessments were done.  The size of the housing grant increased annually but persistent backlogs remained.  The provincial Departments of Housing provided resources and carried out monitoring and inspections.  He said that different engineering standards did not apply to housing programs and the same engineers worked on all the programs.  The DOH was working with the National Home Builders Registration Council (NHBRC) on the development of standards.

The Chairperson referred to the FFC’s comment on the housing development agencies.  He said that there were serious problems with the nine agencies that also affected the municipalities concerned and suggested that the DOH considered the matter.  He said that existing standards should be strengthened before new standards were developed.  He suggested that the FFC was involved when legislation involving housing was considered.

Mr Goeieman expressed skepticism about the relatively quick turn-around in a municipality’s performance on housing delivery.  He asked how the performance of a municipality was measured.

The Chairperson suggested that a team was sent to investigate the diverse points of view raised by the district municipalities and local municipalities in the Northern Cape.  He mentioned Kgalagadi and Sol Plaatjie municipalities as examples.

Mr Robertson requested progress on the accreditation of the Nelson Mandela Metro in the Eastern Cape.

Mr Dlabantu explained that a team first assessed a municipality’s readiness to apply for accreditation.  He understood that this step was nearing completion in the case of the Nelson Mandela Metro.

Mr Robertson asked if the Nelson Mandela Metro had applied for accreditation.

Mr Dlabantu replied in the affirmative.

Mr Robertson said that complaints were made regarding houses that collapsed and that were built on dumping sites.

The Chairperson suggested that the Committee waited for the DOH’s assessment report before visiting the municipalities to investigate the issues raised.  He said that building on dumping sites was not allowed as it subjected residents to severe health risks.  He said that the places where people were relocated to must be investigated as a matter of urgency.

Mr Makinta said that the sharp increase in fourth quarter spending by the provincial Departments of Housing must be investigated.

Mr Sogoni asked what was being done about the issue of vandalism of houses prior to occupation.

The Chairperson recalled the 10000 houses built in Klerksdorp as a pilot project that remained unoccupied and were being vandalised.  He said that there was a growing informal settlement across the road but occupation of the houses was being delayed because of litigation.  He said that the issues of wasteful expenditure, building on unsuitable sites and negligence must be addressed.

Ms Mchunu remarked that where hostels were converted into family units, the occupants continued to leave their wives and children in the rural areas.

Briefing by Department of Transport (DOT)
Mr Collins Letsoalo (Deputy Director-General: Financial Services, DOT) and Mr Mathabatha Mokonyama (Acting Director-General) briefed the Committee on the Department’s response to the FFC recommendations (see from page 55 of the attached document).

The presentation focused on learner transport, road classification, the incorporation of provincial roads into the national road network, the 2010 FIFA World Cup transport infrastructure and the performance monitoring framework.

The DOT reported that 20% of roads have been classified to date and the target for completion of the project was 2010/2011.  16100 roads were transferred to the South African National Roads Agency Limited (SANRAL) but the Department was experiencing some resistance from provinces in this regard.  The Department pointed out that the 2010 World Cup transport infrastructure benefited the entire country beyond the conclusion of the event.  The need to improve public transport remained a priority.

The Chairperson requested a list of the provinces that were not co-operating with the Department on the transfer of roads to SANRAL.  He said that provinces had to submit Integrated Development Plans (IDP) but if roads were in a bad condition it had a negative effect on growth.

Mr Goeieman asked where SANRAL obtained funding for the maintenance of roads if the roads were transferred to the agency without any accompanying funds from the province.

Mr Botha asked what reasons the provinces gave for resisting the transfer of roads to SANRAL.

Ms Mchunu asked what problems SANRAL experienced when the agency took over the roads from the provinces.

Mr Letsoalo explained that certain major roads were shared by more than one province.  In the case of Gauteng, the province had different plans for roads than SANRAL and resisted transfer to the agency for that reason.  He said that progress was being made in the transfer of roads to the agency.  He explained that SANRAL was able to raise loans and issue concessions to obtain funding.

Mr Botha asked if the DOT or the Department of Education controlled learner transport to schools.  He said if the responsibility resided with the DOE, then learner transport can not be combined with the public transport objectives of the DOT, particularly in rural areas.

Mr Kolweni noted that the presentation did not cover transport infrastructure development in the rural areas.

Ms Mchunu said that the development of rail transport facilities was imperative in the light of the steep increases in the cost of fuel.  She suggested that consideration was given to increase rail transport facilities to rural areas, for example between Durban and Pongola.  She suggested that taxi operators were awarded shares to overcome their resistance to rail transport facilities.

Mr Letsoalo advised that the DOT was responsible for learner transport to schools but had no objection to the DOE taking over the responsibility.  Should this occur, the DOE needed to comply with the requirements and would receive the subsidy for providing learner transport.  He said that the 2010 World Cup transport projects were linked to the municipalities’ IDP’s.  He said that the development of transport infrastructure in rural areas was a future focus area for the Department.

The Chairperson remarked that building railway lines was extremely costly and not feasible over difficult terrain.  It was necessary to explore alternative initiatives to rail commuter transport.

Mr Robertson said that learner transport was easier to deal with in cities than in the rural areas where children were often transported to schools on the back of bakkies.  He was concerned over the lack of bus services in rural areas and that many drivers did not have PDP’s.

Ms Mchunu was concerned that no public transport services existed for people who worked shifts, such as nurses and policemen.

The Chairperson suggested Ms Mchunu took up the matter with the provinces.

Mr Letsoalo said that the DOT was better able to deal with transport issues than the DOE.  He explained that the DOE would sub-contract learner transport to service providers.  However, the standards applicable to the transport of learners included vehicle requirements regarding seats and seatbelts and must be complied with.  He said that it was up to law enforcement to ensure compliance.

Mr Robertson said that many villages in remote rural areas were inaccessible because there were no passable roads.

Mr Letsoalo said that the DOT intended to provide a 24 hour public transport service.

Mr Mokonyama said that the DOT advocated the provision of all-weather roads.  He said that several bridges were being built across rivers to allow access to remote rural areas.

Ms Marissa Moore (Director: Transport and Housing, National Treasury) said that the completion of the road classification project was essential to allow for the responsibility for maintenance of the roads to be assigned to the relevant authority.  Assessments of the state of the roads needed to be done to determine maintenance requirements.  She said that only 2% of all roads were tolled and SANRAL received most of its funding from the fiscus.  She reported that the DOT’s Public Transport Bill was in progress.  Cities also needed to take responsibility for the roads in their area.

The Chairperson remarked that there was a gap between the ideal and the reality in matters of transport.  The FFC referred to the establishment of a scholar transport agency but the matter of ensuring the safety of learners was another aspect.  The said that the Constitution made provision for access to education but an alarming number of children dropped out of school because of a lack of transport to schools.  He felt that the issues on public transport versus learner transport should not cause conflict.

The Chairperson asked for a report on the status of unclassified roads.  He said that the Committee needed to discuss the application of the amount of R3 billion that was allocated for the Extended Public Works Program (EPWP).

Mr Letsoalo said that the FFC recommended that the DOE took responsibility for the provision of learner transport services.

The Chairperson suggested that learner transport was considered within the context of the constitutional right to education.

The meeting was adjourned.


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