Municipalities Reports: E-Thekwini, Nelson Mandela Bay & City of Cape Town

NCOP Finance

19 November 2008
Chairperson: Mr T Ralane (ANC, Free State)
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Meeting Summary

The Committee considered lengthy presentations from each of the E-Thekwini, Nelson Mandela Bay Municipality and the City of Cape Town on their challenges and achievements. National and Provincial Treasury, and other entities including Departments of Provincial and Local Government, and of Water Affairs and Forestry, Eskom, and Financial and Fiscal Commission were asked to give their comment. The presentations covered the budgets, the spending, the spending on the conditional grants, capital expenditure, the sources of revenue and the allocations, the special projects, the shortfalls, unfunded mandates, and challenges. More than one municipality raised the problem of the discrepancy between what municipalities thought they would receive after discussions with National Treasury and the eventual allocations. They also questioned the funding of the 2010 and the overruns on the construction of stadiums, pointing out that the municipalities were being expected to pick up the tab when the commitments made by National Departments were passed on to them without any transfer of funding. Each described the compliance with the Municipal Finance Management Act and their special projects, including social projects.

In respect of E-Thekwini Municipality, Members and other entities raised questions around the figures for the indigent, the lack of an indigent register, the reasons for giving free water to everyone, crime in the area, and the decision by the Municipality to levy a business tax, questioning in particular whether the existing and proposed taxes were within the bounds of the law; National Treasury pointed out that this should have been done under the Municipal Fiscal Powers and Functions Act and not Provincial Legislation, with the Financial and Fiscal Commission disagreeing and seeing nothing objectionable in it. E-Thekwini urged that this matter should be discussed and some finality achieved on the issue. The question of the top-up on housing was also discussed. Unfunded mandates were also a contentious issue; the Municipality (like those others following with their presentations) noted that the “choice” to perform work outside the mandates was in fact not a choice but a decision that had to be taken in the interests of service delivery to the public where other institutions had failed to perform. The various mandates included housing, roads, primary health care and libraries. The backlogs were questioned, and the remark was made that details of these should have been given, and questions were also asked around the Municipality’s investments, and tourism. The Chairperson then ruled that all municipalities must look at the various options for funding. The Department of Water Affairs and Forestry must deal with the issues raised. E-Thekwini should put in place a proper indigent register. Urgent discussions were required around housing with various named departments, to look at the capacity of municipalities to deliver housing, and their accreditation.  A report must be made to the Committee within 30 days. There was also a need for a report from National Treasury on the unfunded mandates

The Nelson Mandela Bay Municipality raised many problems and challenges similar to those of E-Thekwini. There was however specific mention that the Provincial Department of Housing was failing to provide any figures. A further problem had arisen since the National Department of Transport had required that the Municipality move some of its transport plans for 2010 to the outer years, due to cash flow problems. There had been some problems with Development Bank of South Africa, which had withdrawn its staff from the Motherwell Project, following unhappiness that it was not awarded a tender in another matter, and the Chairperson ruled that this must be interrogated. Unfunded mandates were cited as a problem. The Municipality urged that "poor municipalities" should be defined as those with high levels of poor households, who did not have the ability to raise rates. In respect of the NMBM, the Department of Water Affairs conceded that there were still some problems needing to be addressed. Members asked who was correcting the badly-built houses, questioned the functioning of the audit committee and Council Oversight Committee. It was noted that the failure of departments to transfer funding to municipalities, including this one, was becoming a major problem as it had direct impact on service delivery. The Members were adamant that the problems surrounding 2010 funding had to be resolved as municipalities ran the risk of becoming financially unstable. They also questioned why certain municipalities were taking responsibility for some projects on which they could not deliver, such as housing, when they had not received accreditation. Treasury conceded that in some cases there had been a problem from their side. Members further commented that there had to be better interventions in the cases of disasters; funds were set aside but must be disbursed properly and as soon as a disaster occurred. Members were critical of the under spending on the one hand and the constant plea for more funding on the other. It was noted that the Nelson Mandela Bay Municipality must interact with the Departments of Social Development, Agriculture, Public Works and Roads to assist them in reaching the Millennium Development Goals (MDG), so that an integrated approach was taken.

The City of Cape Town gave its presentation, highlighting the effects of migration, the housing issues, and the improvements in procurement processes. It wished to have full housing accreditation to fast track housing issues. Internal city funding was limited and the city had to balance non-revenue generating growth against revenue generating growth. A full discussion took place in respect of its finances. Members noted that although the City had been in a very healthy financial position, there were some problems with alignment. National Treasury stressed that any additional sources of revenue must be compliant with the relevant legislation. It also noted that there had been some miscommunication between local and provincial governments, which it would address. The Department of Provincial and Local Government highlighted some problems with the N2 Gateway project, and Eskom also indicated that it had been left to pick up the tab in regard to the electrification of this project.  The Chairperson ruled that the National and Provincial Treasuries, Department of Provincial and Local Government, Department of Housing and the City must address the issues to ensure that allocations did flow to where they were needed. In addition the problems with water service delivery to informal settlements must be addressed. There was a need over the next few years to invest in new technology to speed up the processes.

The City of Tshwane gave its presentation, and highlighted very similar challenges to those of the other metros.  National Treasury warned that although the City appeared to have enough cash, the finances would have to be streamlined to avoid problems with cash flow in future. There had been problems with misalignment of budgets and projects, due to the large number of government offices in this area, and this was something that must be collectively addressed. The Department of Water Affairs noted that it would engage with the City on the constraints around water. Members commented that there had been a number of issues highlighted, and that townships had to be changed through implementation of broad based strategies that could address the lack of roads and the lack of capacity. Members noted that there were particular problems with the credibility of the budgets, as indicated by the over-budgeting and under spending, and that projects would have to be streamlined. Finally, the Committee commented that the construction of a Convention Centre would not add value, and that the City must rather concentrate on the core mandate.

Meeting report

E-Thekwini Municipality Presentation
Mr Logie Naidoo, Deputy Mayor of E-Thekwini Municipality, noted that there had been good work done on the Operational Budget. He also touched upon the initiatives, including electricity housing and basic sanitation. Budget timelines were met, with the budgeting process being completed by April, two months before the start of the new financial Year. All stakeholders were being consulted. The municipality was building housing and had also identified gaps in social housing. He mentioned that pensioners and low income households were assisted in services. There had been investment in various projects to aid economic growth. There remained some concerns about flight of skills from the municipality, which gave rise to concerns around sustainability.  The Municipality continued to look at innovative ways to address this.

Dr Michael Sutcliffe, City Manager, E-Thekwini Municipality, noted that there was an excellent working relationship with National Treasury, who, unlike other departments, did give good feedback and assistance.  The major problem lay in the fact that the majority of growth and development was happening in the top-20 metros and municipalities, yet National Government was not providing funding to support it nor to clear the backlogs. Zero-interest long term loans were ideally required to achieve real economic growth.

Dr Sutcliffe tabled the spatial development framework, noting that of the 800 000 families in the area, nearly 50% were truly poor. Large tracts of rural land also fell under this municipality. The population was at about 4.5 million (officially estimated at 3.5 million), and about 77% were formal households, and about 6% of households lived in traditional areas.

The budget performance reflected about 98% spending. The operating budget had grown by around 18%. The additional grants had been used for service delivery backlogs. He explained the increases in the various categories (see attached document). Building of turbines and port expansion were critical issues. The public entities of Transnet and Eskom were not engaging as they should, and congestion at the ports meant impacts in the areas around, with heavy traffic, impact upon the roads and other problems. He tabled the statistics on capital grant dependency, operating grant dependency, salaries, repairs and maintenance and noted that the debt collection rates were high.

The total budget was around R17 million. Dr Sutcliffe tabled the breakdown of the income and how it was used. He then tabled the performance on the conditional grants. There was almost full expenditure on the Municipal Infrastructure Grant (MIG) grant. There was, however, the need for continuing engagements with National Treasury (NT) about the fact that the majority of poor people were now living not in rural, but in urban, settlements. Over 90% of electricity was reticulated by the City itself. There had been meetings with other departments in respect of construction of courts and hospitals. The impact of climate change was already making itself felt and storm water and coastlines would have to receive ongoing attention over the next few years.

Dr Sutcliffe noted that there was little link between National Treasury’s comments and what was eventually allocated through the Division of Revenue Act (DORA). There were huge imbalances across cities in terms of the allocations.

He then tabled the Integrated Development Plan (IDP), setting out the eight points and noting the alignment at four levels. At present E-Thekwini was the only City able to maintain and grow its manufacturing base, but unless the National Government started to contribute to the growth of the metros this could not be maintained. He stressed that this was not something to be dealt with in the abstract; all the major metros would experience major industrial relocation and industrial interventions were necessary. The alignment with the National Spatial Development Perspectives were set out.

Dr Sutcliffe complained that although there was supposed to be engagement on provincial priorities the officials who attended meetings were not high enough ranked to make decisions. There was alignment with other spheres, including bulk service providers of Eskom and water boards. National Government had reneged on a promise to take over debt and E-Thekwini was ending up paying for it. This was one unfunded mandate that impacted hugely. The National Electricity Regulator (NERSA) had also set standards and accounting practices that did not conform with others, which meant that two sets of accounts had to be drawn.

He describe the linkages with national and provincial macroeconomic objectives. All the competitors were being brought together in a cluster for manufacturing, and this had been useful. There were strong public/private schemes initiated that were driven by the public sector

There had been general compliance with the Municipal Finance Management Act (MFMA), despite some difficulties with the move to the new system. He listed the various areas. He noted that the audit report was unqualified and the Section 71 reports were on track.

Dr Sutcliffe then tabled the social package, noting that pensioners would not pay rates on the first R400 000. value, and that 9 kilolitres of water were provided free, as well as some other free services in rural areas. He tabled the delivery statistics for electricity, solid waste and the capital budget spend. E-Thekwini had more capacity than in any other national or provincial department in the country. In ten years it had doubled what the apartheid government had delivered in 60 years. There were however still major backlogs in housing and service delivery. On average there was delivery of 16 000 houses per annum, and by 2012 it was hoped that the majority of the backlog would have been wiped out. Social and inclusionary housing must be included as 20% of all developments, aimed at those earning R3 500 to 9 000 per month. Infill housing programmes imposed quotas to try to de-racialise areas. He reiterated the need for National Government to make funding available to cities to enable them to deal with backlogs to meet the targets.

He then tabled the strategic priorities for 2008.9, which included immediate issues on poverty through to longer-term issues around sustainability. This City believed that the rail was as important as the bus network. He described the interventions for sports stadiums, the methane gas diversion project, which had contributed to good biodiversity, and the new energy office focusing on new ways to use and minimise use of energy, the public transport approaches, and the long term view taken on the Moses Mabhida stadium, which was capable of being expanded also for the Olympics, and which was to be economically operative all the year. E-Thekwini was the first City to install a totally secure network, and was selling some of this to the private sector; the funds to be used to upgrade broadband. The coastal development strategy and safety and security interventions were also shown.

Dr Sutcliffe then started to detail some of the challenges. He noted that there were capacity constraints. There were critical vacancies of senior, technically qualified staff, despite raising salaries.  He stressed that it made no sense that the City was still not accredited for Housing delivery as having to wait for approvals slowed down the process. There was a need to examine transport subsidies and inner city distribution system funding. There was no link between the formula agreed upon with NT after discussions and the money that was eventually given to the host cities for the 2010 World Cup. Two years ago he had requested that attention be given to the Import tariff issues and foreign exchange issues, but this had not happened. There were also critical issues around unfunded mandates. The rates funding was insufficient to fund local government functions, and he suggested that a new Business Tax was needed.  

Discussion
The Chairperson asked about the population figure of R3.3 million, of whom 58 000 were described as indigent. He asked if that was a correct figure, saying that if it was not, then the interventions would need to be re-costed. As a related question, he asked what the financial implications would be then of providing 9 Kl of free water to every indigent person. He said a proper updated register was needed. He further enquired about write-off of indigent debt, which was again dependent on a proper register.

Dr Sutcliffe noted that the number of indigents was based upon every person who was without housing – a figure of over 200 000, as well as those without adequate housing. The figure of 58 000 was related to those who were getting free basic electricity. No electricity was allowed in informal settlements because of the risks, so in fact only about one quarter of indigent people had access to electricity. Water was being provided to all of the 200 000, and to about 20 000 rural households. Indigents were getting access to services. Insofar as write-off of the debt was concerned, he said that they were asked to pay the current debt over 48 months, to create a culture of payment.

The Chairperson asked about the top-up of housing.

Mr M Robertsen (DA, Eastern Cape) asked for clarity on the moneys paid to the Office of the City Manager.

Dr Sutcliffe noted that there were five heads of departments who reported to him, and the expenditure was on those departments.

Mr Robertsen noted that Committee Members who had done an oversight visit were warned not to leave their hotel after dark and bag-snatching was rife in the areas. However, this was exacerbated by the failure of the police to apprehend the criminals due to them being extremely unfit. He feared that there would be serious problems with the influx of tourists in 2010.

Dr Sutcliffe noted that many criminals were taking advantage of the regeneration of the beachfront. In respect of the police, he agreed that there was a need for fitness training, but this was being done now.

Mr Robertsen questioned whether taxing businesses even further would be viable.  

Dr Sutcliffe noted that there was already a tax on business, that was raised by using the existing Ordinance provisions, and it was successful. The City had engaged with the Chamber of Commerce on it, and there was general support and appreciation of the reasons. There was also a business enhancement fund. He believed that this model had worked well.

Mr Sam Kgatle, Director:Local Government Budget Analysis, National Treasury said that the spending was on target. However, he was concerned about three issues. He noted that some of those households getting the free basic water might be able to pay for it, and because it was designed for the indigent, anyone who was not indigent should be paying.

Dr Sutcliffe noted that there was not an indigent register. Everyone in an informal settlement, whether working or not, was classified as indigent. Those in the informal settlements would get water from standpipes. Once they moved outside those settlements, they would fall under the 9Kl rule. Anyone using more than 9Kl would be charged a service and usage charge. E-Thekwini had taken a conscious decision to keep the 9Kl free for everyone, thereby giving them incentives to use less water, and this was also far easier to administer. Those people outside the informal settlements who still needed the Free Basic Services would have to register. This was where the figure of 60 000 having to register for housing had emanated. 

Mr Kgatle questioned the tax on business. He said he was worried to hear that this was derived from the Provincial legislation. The Fiscal Powers and Functions Act had said that any legislation contrary to the functions set out in this Act must be repealed and he said that he would engage with the Departments of Local Government and Housing and traditional Affairs to do so. He thought that the levies should only be raised under this Act and no longer under Ordinances.

Mr Kgatle noted that Moses Mabadha Stadium was a “state of the art “stadium, but he noted that it seemed to go beyond the specifications and have aspects of over-design that would be too costly. He noted that allocations would only be made according to the specifications. 

Mr Kgatle asked for a progress report on the process of getting proper oversight to deal with annual reports and he asked for feedback

Mr Jan Hattingh, Chief Director, National Treasury, supported the comments that the poor were migrating to and now to be found mostly in the cities. He also supported the comments on housing and said there was a process to try to facilitate housing competency being given to metros.

Mr Hattingh did not, however, agree with the remarks on unfunded mandates. He said that if E-Thekwini made a decision to give a top-up on housing then the Metro should bear the costs. This was not an unfunded mandate but a conscious decision by the Metro.

The Chairperson said that the first question was whether there was power to deal with this. Funding must follow the power, and that was the issue that was critical. If a City Council took a decision that they must do something because the authority theoretically responsible was failing to act, then this was an issue that needed to be resolved.

Mr Hattingh said that he did not disagree with the observations, but until it was a mandated competency of local government, then the funding could not be given.

The Chairperson said that although the core business of the Municipality might be stated narrowly, in practice Municipalities were having to take other decisions, as the failure by others to act would have serious implications on service delivery.

Mr Hattingh responded that there were proposals to derogate functions properly. He agreed that in the interest of social society, decisions might be taken, but when it came to the financial side, there were certain rules. National Treasury took the point about the needs, and hoped to reach a satisfactory solution.

Dr Sutcliffe said that the top-up on housing was not an unfunded mandate. E-Thekwini had decided not to build houses that were of an inferior quality, and that money for the top-up was being paid out of the rates base. The administration costs of the housing programme, and the things that had been "dumped" by provincial government were the unfunded mandates.

Mr Hattingh added that, in respect of the remarks around 2010, it was never the intention of National Government to pay for the full costs. There was a fiscal framework, and the 2010 Team would have to decide what was affordable.

The Chairperson asked what would happen in the context of the price increases.

Mr Hattingh suggested that it would be useful for the 2010 Task Team to come to the Committee to explain certain decisions.

The Chairperson agreed; since there was a need to deal with the escalations, some of which had been dealt with in the adjustments

Mr Hattingh agreed that there had been contributions though the adjustment budget.

Mr Hattingh then commented on the suggestion of having a fund to fast track for construction and development. He said that NT must consider that. The intention was to divert the most money not to metros, but to the poorer municipalities. That did not take away the challenges around funding.

Mr Hattingh noted that the business tax should perhaps be dealt with by the Financial and Fiscal Commission. He said that there had been replacement of the former Regional Service Council levies by a fuel tax approved by the Minister, and he would encourage this approach rather than adding another business tax.

Mr Hattingh commented that there was a challenge in the way that information was presented. It seemed, from the slides, that the municipality was over-spending. Some of the work done jointly in the processes must be reflected in the budget.

A representative from the Department of Provincial and Local Government (DPLG) questioned some of the figures on the slides. He said that although E-Thekwini had done well in spending on the MIG, there was some question about achievements on the ground. E-Thekwini had received the highest allocations, receiving R456 million in this year. Over the past four years over R1.5 billion had been granted. He said that if the money was being properly spent then greater results should be seen. He noted that the backlogs figure was virtually the same now and in 2004. There was a need to state exactly what the funding had achieved. He suggested that there was a need to tighten the monitoring systems and said that there was work being done with NT to address some of the issues.

Dr Sutcliffe noted that of the figure of backlogs, a large percentage was in respect of housing. The E-Thekwini was grateful for the MIG funding but this was certainly not sufficient to deal with the backlogs. 

Dr Cornelius Ruiters, Deputy Director General, Department of Water Affairs and Forestry (DWAF) noted that it was disappointing not to see a detailed breakdown of the backlogs other than on slides 33 and 4. He noted that there had been engagement with E-Thekwini on Umgeni Water, and there was a need to see what the main issues were and how to address them.

The Chairperson urged several times that a fixed date must be set for the meeting and the report back.

Mr Ruiters added that there were plans to augment supply from one dam and to raise the Hazelmere Dam. Security of supply was being addressed. In answer to a question from the Chairperson, he confirmed that the municipalities had been part of the process. .

A representative from Eskom, in response to a question about the supply and alignment with IDPs, confirmed that he had copies of letters exchanged. There were monthly reports being made to the municipality. There would also be regular meetings with the town engineer.

Mr Bongani Khumalo, Deputy Chairperson, Financial and Fiscal Commission, commented upon the business tax. In the 2008 Division of Revenue Act (DORA) there had been suggestions that municipalities explore other taxes under the legislation, and FFC had no problem with the business tax, which was a purely local tax over which E-Thekwini had control.  Whilst he understood where NT was coming from in remarking upon the replacement of the RSC levies, this did not fall in this category, being local tax and not to do with revenue sharing. In principle the FFC would support it, and felt it was within E-Thekwini’s power to decide what tax to enforce. 

Dr Sutcliffe noted that it was useful that this Committee was debating the levies. This was a disputed cost and he thought that it should be decided upon once and for all, as the doubt about it was affecting the transformation issues.

The Chairperson noted that there had been no reference, in the report on the compliance with the MFMA, to moneys invested. He noted that investments were authorised of moneys not needed immediately, under Sections 13 and 14, but asked whether this was being properly dealt with, and noted also that if there were investments the E-Thekwini must explain its requests for more funding.

Dr Sutcliffe noted that these were not long term investments. He noted that his investment team, which was investing the surplus that was not needed each month, had actually out-performed the banking sector investors.

Dr Sutcliffe then complained that a further problem arose around tourism and beaches. The “blue-flag” beaches were being chosen only from the formerly white beaches and although there were many fine swimming beaches with perfect water quality they were excluded because, for instance, they might not have a parking area or bins. He commented that in the area there was a science laboratory that could investigate water quality, but it was not considered to be “independent” whereas water was instead being sent for testing to pathology laboratories. He commented also that the tourism was not projecting black people as tourists. He commented that there was a need to change the whole approach.

Ms B Ntuli (ANC) began to ask a question, but the Chairperson noted that this was not related to the presentation this morning and he ruled that it could not be entertained.

The Chairperson then ruled that E Thekwini and other municipalities should look at the options for funding and see what was practically possible. He noted that DWAF should deal with the issues raised. E-Thekwini must address the issue of the indigent register, so that the Committee could consider matters on the basis of proper figures. Urgent discussions must be held between NT, E-Thekwini, the provincial department of Local Government and the National Department of Housing around the housing issues, which looked at the  capacity of municipalities to deliver housing, and the possible additional capacity required, as the Provincial and National Departments of Housing should be providing funding with a view to accrediting the municipalities for housing delivery. The DPLG, Provincial Treasury and the provincial Department of Local Government must link to a rural node, which must be prioritised. Government-wide integration was critical. He said that he wanted to have a report within 30 days.

In respect of the comments around alignment and attendance of meetings, he said that anyone wanting to undertake infrastructure in any municipality should already have had their plans submitted by June to the Provincial Treasury. The Departments and municipalities should be engaging to find out how many schools, hospitals and so forth were planned, and whether these were in line with the IDP.

The Chairperson further stressed the need to have a report from National Treasury on unfunded mandates, which E-Thekwini had been writing letters about for many years. IF there was no budget then he asked how the forthcoming budgets would deal with the issues.

The Deputy Mayor thanked the Committee for the interventions and looked forward to useful interaction. He said that the Municipality would continue to look at innovations. He believed, personally, that too much was paid for water, since E-Thekwini were purchasing 80% of Umgeni’s water. 

The Chairperson noted that there would be further engagement and monitoring. He noted that it was critical to have IDP credibility. As the service was provided, it must also be improved. The information must be up to scratch.

Nelson Mandela Bay Municipality (NMBM) Report
Adv Graham Richards, City Manager, Nelson Mandela Bay Municipality, noted that this municipality had a population of 1.1. million and 289 000 households. The total budget was just over R7 billion. This was a major economic component, in a province reported as the second of the poorest places in the country. The Nelson Mandela Bay Municipality (NMBM) contributed about 50% of the gross domestic product of the Province.

He tabled the budget performance ratios, stating that these were self-explanatory, reflected a fair level of performance and were also using targets that were part of the municipal restructuring grant agreement with National Treasury. He noted that there must be a measure of personnel costs in the total operating costs. However, there was some tendency to treat "a measure" as some sort of absolute, and there was a constant stress in management who, on the one hand, were told to fill the vacancies, whilst on the other were attempting to balance the costs. 

The sources of revenue were tabled. He mentioned that recovery rate on fines (mostly traffic fines) was unsatisfactory, but there was a plan to establish a more functional back-office system. The levying was on track, but recovery was not. There were difficulties in assessing the revenue properly because the Provincial Department of Housing, despite request, could not even name the amount of money to be awarded for one year at a time, let alone three.

The Chairperson questioned this.

Mr Hattingh (National Treasury) noted that he could supply copies of the letters to which there had been no response.

Adv Richards noted that there was a balance of cash flow and the NMBM also invested some money coming in.

He tabled the budget and actual expenditure, saying that this was self-explanatory. Capital expenditure was at 98.6% of budget. This reflected a reasonable level of improvement over the prior financial year. The capital expenditure according to IDP priorities was shown in diagrammatic form. The balance was good, with primary focus on service delivery and infrastructure development, with another large focus on financial viability and sustainability. He then tabled the sources of funding. He drew attention to the Capital Replacement Reserve, which could be regarded as the "internal bank". The NMBM had been able to retain a reserve against which it would borrow for the purposes of supplementing capital expenditure. The ability to do so was under pressure, not only because over the last two financial years the level of its own contribution had been increased, but also because the cost to the municipality of delivery on the 2010 World Cup was also rising.

The Chairperson asked what the Provincial Housing Board subsidies were.

Adv Richards noted that this was reference to the funding coming to the NMBM that represented the collection of individual subsidies. The Housing Revolving Fund was the internal fund established over time that was used as a bank for advancing money, and it would be replenished as the subsidies were received. Spending was necessary before receipt of money, hence the need to cover the gap.

The Chairperson appreciated this, but asked whether this might distort the budget.

Adv Richards said that this was set up over a number of years. It was primarily related to urban renewal and was focused on projects within the Motherwell project.

He noted, in regard to revenue collection, that current collection levels were around 99%. All assistance to poor households was on prepaid meters. There had been improved customer care, where customers could engage in financial issues. Pre-paid electricity account holders whose other services fell into arrears could be asked to call into Treasury, and a percentage of future pre-paid services would be allocated to arrears on other accounts, which was working well. There was continuous monitoring of water leaks. Achieving good recovery cut down on the need to make provision for doubtful debt, thus freeing up the opportunity to provide for larger amounts of free basic services.

Adv Richards then tabled the Conditional Grant Performance, and set out the reasons for over and under expenditure (see attached presentation. In the current financial year the NMBM was ahead of programme on the MIG. The stadium funding was always slightly ahead of budget. The transportation funding was on track but there were some problems since the National Department of Transport had put the NMBM under pressure to re-prioritise spending on the World Cup Transport Programme, and move some of the budgeted items outside the 2010 window, because of cash flow problems in the National level. Although the total allocation would not change, some projects would not be completed by 2010, but were to be moved to later years. This had posed some political problems. He had raised questions around the Division of Revenue, and promulgation of the changes, but none of this had happened.

The Chairperson asked if there had been alteration of the figures in the DORA.

Mr Hattingh commented that this action by the Department of Transport was unacceptable. He wondered if perhaps some of the host cities might have been working faster than others, and therefore there might have been a process to manoeuvre the cash flows.

The Chairperson said that "scaling-down" was not about capacity to perform. He said that he would need to find out more about the reasons. This had a negative impact on planning.

Adv Richards said that the Mayor had taken up the matter with the Minister.

The Chairperson asked that a copy of the adjustment appropriation be obtained, to check what pertained to the Department of Transport. This issue had implications beyond 2010 and would have to be looked into.

Adv Richards noted that the demands of the taxi associations was also problematic as they were threatening a taxi strike, and a suspension of contracts with a view to cancellation would cost in excess of R25 million, which would not be recoverable from the grants. If some of the projects were to be cancelled, then not only would there be lack of compliance with FIFA requirements for 2010, but there would be R80 million wasted expenditure also.

Adv Richards moved to describe the Motherwell Urban Renewal was reflected on the figures. There had been difficulty with the private owner of land that was earmarked for developments, and there was also a reneging on agreements, which ended up being unaffordable. There was a political process to renew the projects.

The Chairperson noted that Motherwell had been included in a pilot project on sustainable communities. He said that the Development Bank of South Africa (DBSA) had commented that there had been withdrawal.

Adv Richards said that this was a distortion of the situation. DBSA had provided grant funding, through he allocation of support staff, particularly in relation to the sustainable communities project in Motherwell, NMBM had offered loans, primarily for electricity development and several institutions, including DBSA, had tendered, but DBSA was not competitive and was rejected. It had then approached NMBM, implying that because of its contribution in Motherwell it had a right to preferential treatment. This too was rejected. A few months later, without any notice, DBSA withdrew its staff from the metro, and there had been no further engagement since then, even to requests seeking clarity whether the full staff were to be permanently withdrawn. NMBM felt aggrieved about the DBSA's attitude to Motherwell, although Adv Richards did say that there were some other positive and ongoing engagements.

The Chairperson said that it was unacceptable for institutions to misrepresent the situation to the Committee; he was glad that there had been opportunity for engagement prior to the meeting with the DBSA. There had been some inconsistencies also in the latter’s Annual Report, such as claims of assistance that contradicted the National Treasury's allocations. The DBSA did not have a monopoly on the market. It seemed to be becoming more "commercialised" and he did not think that this was appropriate.

An official from the DBSA noted that he would report this view back.

Mr Hattingh noted that it should be put on record that the Department of Transport's approach was also unacceptable.

The Chairperson agreed and said that all departments should be assisting each other.

Adv Richards then tabled the performance on the Conditional Grants, saying that much had been achieved. In the field of intergovernmental relations there had been active participation. The level of participation remained important; and he too stressed that it was important that high-level officials with powers of decision should attend meetings.

Adv Richards then said that he too wanted to speak to unfunded mandates. NT was adopting quite a narrow approach. He cited the example that although libraries were not a municipal function, in practice this was done by them out of necessity, as they were seen as an essential component of the education system, having study halls and wireless computer access, as well as research books. The NMBM really had no choice, in the interests of the public, other than to run these despite the lack of funding. |The same was true of primary healthcare, where the provincial department would agree that there was a need, yet would not give money for operational costs. Other unfunded mandates were provincial roads and housing delivery. Although it was claimed that the NMBM was exercising “a choice”, the alternative of doing nothing, with resultant lack of service delivery, was simply not possible. In respect of housing delivery he noted that there was no funding given for the office that performed the administrative and delivery functions.

Adv Richards noted that Environmental Impact Assessments (EIAs) remained a problem because of delays and he would sometimes be forced to tell his officials, where it was clear that the approval would be given but had been delayed, to go ahead, once again in the interests of service delivery.

Adv Richards noted a problem with the financial relationship with DWAF, although there were good relationships on water quality, due to delays in receiving invoices for bulk water, which distorted financial management in NMBM. A further challenge was that NMBM was owed R53 million by government departments, notably the Provincial Departments of Heath and Education. In addition  the Department of Public Works was not paying rates, giving the excuse that the money had not been transferred. National Treasury had said that this was not correct.

Adv Richards noted that time was running out to bring the electricity tariff increases before 15 March. Additional extensions had been given this year, which were ultra vires the Minister’s powers, and which also had a significant impact on municipalities. He asked how the municipalities, who were already using their equitable share to the maximum, would be able to fund the Free Basic Electricity, noting that it would have to make choices around operational spending.

Adv Richards set out the alignment between the IDP and the PGDP. He furthermore noted that there was full  compliance with the MFMA’s 14 key priorities set by National Treasury. He paid tribute to his Acting Chief Financial Officer for his improvements to the systems which had greatly improved the compliance over the last two years. There was a cluster system to achieve integrated and coordinated service delivery.

Adv Richards then summarised the service delivery outputs to the 289 000 households, in the areas of electricity, sanitation, refuse removal, and roads.  He noted that the NMBM was working also with the Coega Development Corporation to find alternative sources of energy, including a major gas turbine with a large output. He noted, in the area of sanitation, that there were 15 000 bucket-systems that needed to be eradicated.

Adv Richards noted that there was an indigent register, and there was an extensive outreach programme to register customers who clearly needed assistance. More than 40% of households in the NMBM were indigent. He urged that "poor municipalities" should be defined as those with high levels of poor households, who did not have the ability to raise rates.

Adv Richards then detailed the constraints and challenges. Unfunded mandates had already been touched upon. He too emphasised the gap in funding 2010 World Cup projects, saying that the discrepancies requiring loan funding to be obtained were not taken into account. Over the next 10 to 15 years the Municipality would have a substantially reduced ability to pay for infrastructure rehabilitation and expansion.
The World Cup was showing substantial overruns, and there was still not determination of roles and responsibilities. Often the National Departments (such as Safety and Security) would pass on the commitments they had made to be served by the host cities, without passing on funding. Assistance was needed from government was needed in the areas of government debt to municipalities, unfunded mandates, the zero rating on agency fees, the hosting costs for the World Cup, the exemption on import duties for World Cup related goods, the housing delivery allocations that needed to be gazetted, and the funding for tarring of gravel roads for the housing subsidy programme.

Discussion
Mr Cornelius Ruiters of DWAF said that in terms of invoicing DWAF had implemented the SAP system that would streamline billing processes. He said that the problem highlighted by the NMBM also impacted on DWAF’s revenue to effectively fund maintenance and refurbishment programmes. He added that DWAF wanted to continue with the positive relationship it had with NMBM.

He concurred with the NMBM on the problems around the eradication of the bucket system and said that the remaining blockages had been due to the existing bucket system in informal areas that still awaited adequate housing delivery.

Mr Helgard Muller, Chief Director, Water Services, DWAF, said that the question had to be asked what value could be gained from tariffs, as these had to be balanced. The tariff increases in the NMBM had been considered to be too small.

Mr Robertsen asked what had happened to the inferior houses that had been visited by the Committee. He also requested the NMBM to forward a list of all government departments and entities that owed money to it.

Adv Richardson said that one of NMBM’s newly appointed executive directors had conducted an audit of all outstanding issues and categorised them for better facilitation. He noted that a Housing Turnaround Strategy had been implemented to deal with the housing issues and that although many of the defective houses should have been fixed by the Provincial Department of Housing, who had built these houses, in fact NMBM had been busy with fixing the defects.

Mr E Sogoni (ANC, Gauteng) noted that the failure of departments to transfer much-needed funds to the NMBM had become a problem, as this had impacted on service delivery implementation. He also asked for clarity on the functions of the Audit Committee, the Audit Steering Committee and the Council Oversight Committee.

Mr Richardson said that the Audit Committee was an integral part of government structures and had been emphasised as an important oversight function in the MFMA. The Audit Steering Committee was an administrative committee that consisted of executive directors of the NMBM, the Municipal Management and an official from the Office of the Auditor-General (AG) that managed the audit processes. He said that this worked very well as it reduced risks and ensured the smooth flow of accurate information to the AG. He added that in terms of the MFMA, town and or city councils had been required to produce an oversight report that would be compiled by a multi-party council subcommittee, which must then review and debate the report and then report back to the Council.

Mr Sogoni added that the problems surrounding 2010 funding had to be resolved, as municipalities should not be responsible for funding a national programme such as the FIFA 2010 World Cup when this would lead to critical service delivery objectives being compromised. He said that he understood that the municipality would benefit from 2010, but it should not accrue these eventual benefits at the expense of becoming financially unstable in the meantime.

He added that he failed to understand why certain municipalities would want to take responsibility for projects that they knew they could not actually deliver on, especially on the housing delivery authority for which NMBM had not received accreditation.

Mr Vincent Malepa, Deputy Director, National Treasury,  replied that for the past four years the NMBM had had reported on the issue of unfunded mandates and he felt that National Treasury (NT) had failed the NMBM. He added that NT would engage with all relevant departments that had reneged on their mandates.

The Chairperson noted that disaster funding should not be problematic, as all government departments had a provision in their budgets that allocated a certain portion of the budget to unforeseen and unplanned events such as disasters. He said that the problems became much bigger and more expensive if there was a delay in the rollout of funds for disaster management and that all the relevant systems had to be in place to give immediate relief when there was a disaster.

He added that the finalisation of roads and the assumption of responsibilities had been a critical matter, and that he found it peculiar that the Eastern Cape province, which was notorious for under spending, always pleaded poverty, regardless of the amount of funding that had been transferred.

The Chairperson said that the NMBM had to call in the Departments of Social Development, National Department of Agriculture, Public Works and Roads to assist them in reaching the Millennium Development Goals (MDG). He said that there had to be an integrated approach to tackle the issues such as poverty.

A City Councillor said that the politicians in NMBM always strove to achieve their goals through the solicitation of ideas from the communities they served. If they failed to deliver on their mandates then they ran the risk of being rejected by their constituents at polling time. He agreed that there had been many problems around the state of the roads, and lack of funds to fix them, which sometimes made it difficult to visit outlying areas. He said that the actions of politicians across the whole political spectrum who refused to release funding hindered the work of Councillor.

City of Cape Town (CCT or The City) presentation
Mr Ian Nielsen, Mayoral Committee Member for Finance, City of Cape Town, led the delegation by the City of Cape Town.

Mr Nielsen said that the City’s growth had been driven by in-migration and that more infrastructure such as roads, waster water, public transport and water reticulation had been required due to the upward economic mobility of the population. Informal settlements would be upgraded and development imperatives such as a Rudimentary Services Strategy and an Informal Settlement Upgrade Strategy would be implemented to drive this process.

He noted that the City had adopted a variable growth strategy that had combined both the densification of the existing City footprint and the targeted expansion of that footprint. The key requirements for the targeted expansion strategy included development into high growth areas that would be supported by investment nodes, public transport and social infrastructure. The City also had key partnerships with four state-owned-enterprises namely, the Ports Authority, Cape Town International Airport, Transnet and Eskom.

The City’s IDP had been fully aligned to the Provincial Growth and Development Strategy and included alignment on infrastructure development, local economic growth and regional growth. Mr Nielsen said that the Provincial Isidima  (Housing) document had also been aligned to the City’s Five Year Housing Plan and the IDP. He noted that it was hoped that the agreement signed between the Premier of the Western Cape and the Mayor of Cape Town would lead to better relations between the provincial and local governments.

Mr Nielsen said that supply chain management had been a key catalyst to delivery at all levels within the City and that great strides had been made in addressing its procurement processes that ensured that BEE support and the expansion of the Expanded Public Works Programme received adequate attention. The City had also appointed a community-based group that would assist in housing contract administration, debt collection and debt management.

The City had indicated that it was ready for full housing accreditation to fast-track housing delivery and that it had received conditional level 1 accreditation. It was noted that all relevant funding had to be allocated on a multi-year programme basis that was linked to specific projects and the City’s IDP.

Mr Nielsen said that the City had to balance non-revenue generating growth with that of revenue generating growth, as internal City funds had been limited. He said that funding for major national imperatives such as 2010, bulk infrastructure, the bus rapid transport system and housing delivery mandates had to include national funding allocations.

The financial indicators were fully set out and were summarised by Mr Nielsen (see attached document)

Discussion
Mr Ralane said that the City of Cape Town had been in a very healthy financial position, but had highlighted problems with alignment.

Mr Sam Kgatle (NT) said that during the 2008/2009 financial year there had been an increase in the capital budget by 76% and noted that the City had to put systems in place that would ensure that it spent its capital budget reasonably.

He added that if the City wanted to find alternative sources of revenue then any additional tariffs had to be raised in line with the relevant municipal legislation.

National Treasury also noted that an exercise had been done with metros and that there had been problems with miscommunication between local and provincial governments. National Treasury would implement a system that could address this.

Mr Bologo (DPLG) said that although the City had indicated that its MIG Expenditure had been affected by misalignment, this was not true, as funds that had been allocated in 2007 had not been fully spent.

He added that the City still owed money to the contractors that built the N2 Gateway Housing Project and that a Communiqué had been received to the fact that this aspect had not been finalised yet. The City had been told that it could not invest the funds for MIG, as expenditure had been very low.

He said that the City had a housing backlog of 300 000, and it had been asked to conduct an assessment and review on available land.

The Chairperson said that National Treasury, Provincial Treasury, DPLG, and the Department of Housing must all meet together with the City of Cape Town to discuss these issues. He said that it was important that service delivery took place and that allocations should flow to where they were needed. The City had to be assisted if it had problems.

Mr B Jack, Divisional Programme Manager, Eskom, noted that it was not true that Eskom had failed to comply with IDPs, as it had documentation that proved such compliance. He said that the City had to have an alignment strategy in terms of housing and electrification. Eskom had to pay for the electrification to the N2 Gateway Project and Delft after the City of Cape Town had withdrawn. Problems had further been exacerbated by the fact that the City and Eskom had different end of financial years.

He said that Eskom would not give new points of supply, and that the embargo had been lifted at the end of 2007 and that it awaited applications. Eskom would also engage with the City on the Koeberg land issue within the next week.

Mr Ruiters noted that many informal settlements still had a problem with water service delivery, which the City must address. Asset management was considered to be fundamental as it had impeded on the City’s mandate to deliver water. He added that the City had to make hard choices during the next augmentation scheme in terms of utility services and bulk water infrastructure, and that it had to invest in new technology that could speed up the process.

Mr Muller noted that the City had to address the issue of water losses and that these had to be quantified.

Mr Sogoni noted that the City had to be assisted in aligning its budget and in ensuring that it paid its creditors.

City of Tshwane
Mr Kibi Kekana, City Manager, noted that The City of Tshwane noted that it had a population of 2.3 million with 686 640 households. It had 78 % formal and 26,8% informal dwellings. It consisted of 76 wards with five administration regions. The City had 51 070 indigent households that received 6 Kilolitres (Kl) of free sanitation, 12kl free water, 100kWh electricity and had been exempt from paying property rates. The total expenditure by the City totalled R113,9 million in 2007 and R157.7 million in 2008.

The City had spent R90 million on road infrastructure, and R52 million for City Development Strategy. R220 million had also been spent on the eradication of various infrastructure backlogs, through the Municipal Infrastructure Grant. It had also spent R52 million on its “electricity for all” programme that would eradicate the infrastructure backlog.

In terms of the IDP Process the City had identified three key aspects of the PGDS Strategic Levers. It said that the manufacturing sector had to be realigned, and there must be broadening of business activity and the promotion of financial and business services.

The City indicated that it faced several challenges such as the concurrent housing powers and functions. This had led to a decrease in housing delivery. The housing accreditation issued had been considered to be inadequate for full service delivery. The late transfer of funds and money owed to the City by government departments had seriously impacted on the City's finances.

The detailed budgetary and financial information was then tabled.
This included the budget performance, the operating revenue by source, the operating expenditure by source, capital source funding and expenditure, external loans and a list of long and short term investments. The breakdown of the debtors was also provided. The spending on the various grants was also tabled.

He then described the inter governmental relations, saying that there was engagement with provincial sector departments. He noted that the concurrent functions in respect of housing tended to slow down the efficiency of housing delivery. Late submission of comments by Provincial and National departments on draft budgets was also problematic.

Mr Kekana set out the compliance with the Municipal Finance Management Act. He then went on to detail the service delivery, the backlogs and described the constraints to effective delivery as including the inability of residents to pay for services, the scarcity of skilled staff, inflationary costs of material, theft of pipes and other equipment in respect of all services, the fact that the number of indigent people was doubling every three to four years, and insufficient growth in the region. 

Discussion
Mr Jan Hattingh (NT) said that it appeared as if the City of Tshwane had a lot of cash, but National Treasury had warned it to streamline their finances, as there was the possibility that they might have cash flow problems in the future.

Mr Bernard Mokgabodi, Director, National Treasury, said that he had engaged with this City  on a regular basis and that a meeting would be held with them where dire issues would be discussed. He noted that his office would furnish the Committee with a report on the outcomes of that meeting.

Mr Bologo said that all government offices were situated in Tshwane and that misalignment of budgets and projects had become a big problem, which had to be addressed collectively.

He added that DPLG had a developed a very good working relationship with Tshwane on city infrastructure and that they had been advised to build a management capacity unit that could address all the pertinent issues.

Mr Ruiters noted that DWAF would engage Tshwane on the constraints on water, and augmentation of the bucket system, and agreed with Mr Bologo on the need for a unit that would assist the city.

Dr Patrick Ntsime, Project Manager, DBSA, said that Tshwane had been a key strategic partner and that certain interventions had been identified that the DBSA would continue in its engagement with Tshwane.

Mr Sogoni said that the Committee had worked under the assumption that metros had been doing well. In fact, it now seemed that close attention had to be paid to a range of issues, such as the update of the indigent register. He said that the face of South Africans townships had to be changed by through the implementation of broad based strategies that could address the lack of roads and the lack of capacity.

The Chairperson noted that Tshwane had problems with the credibility of its budget, with several instances of over budgeting, as well as under spending on certain projects. He said that the City should forward all the names of public servants that owed money to the City. He also noted that the City must streamline all its projects.

He added that he did not think that the construction of a Convention Centre was such a good idea as many other centres in South Africa struggled financially. He said that there had been no need for these white elephants and that the City should rather stick to its core mandate, which was service delivery.

The meeting was adjourned.

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