ATC100601: Report 3rd Quarter Conditional Grants Spending Patterns on Devolution of Property Rate Funds Grant for the 2009/10 financial year

NCOP Appropriations

Report of the Select Committee on Appropriations on the third quarter conditional grants spending patterns on Devolution of Property Rate Funds Grant for the 2009/10 financial year, dated 01 June 2010:

 

1. Introduction

 

The Select Committee on Appropriations (the Committee) invited identified provincial departments of Public Works, who were either under-spending or over-spending on the Devolution of Property Rate Funds Grant, to come and make a presentation on their third quarter spending in the 2009/10 financial year. The statistics on spending patterns were published by the National Treasury in March 2010.

 

The Committee meeting took place on Friday, 7 May 2010. Meetings were held at Committee Room S12A in Parliament of the Republic of South Africa.

 

2. Terms of reference 

 

The public hearings formed part of the Committee’s ongoing interaction with provinces to monitor their spending patterns on conditional grants allocated to them. A framework for the grant sets out, among other things, the purpose of the grant, measurable objectives, conditions, allocation criteria, and past performance.

 

Provincial departments of public works were requested to make presentations on the Devolution of Rate Funds Grant and to take into consideration the following:

  • Data trends in allocations, transfers and actual expenditure of conditional grants of the provincial department;
  • Assessment of provincial department’s monitoring capacity for the 2009/10 financial year and, indicate under-/over-spending and what capacity constraints have impacted on these outcomes;
  • Report whether monthly reports are received from receiving departments or municipalities, and if not, what the departments are doing in order to ensure compliance with monthly reporting; and
  • Medium-term strategic plans.

 

The provincial departments of public works of Western Cape, Limpopo, Eastern Cape, Gauteng, KwaZulu-Natal and Northern Cape were identified and invited. All provincial departments honoured the invitation.

 

The National Treasury was invited to brief the Committee on the third quarter spending by the above-mentioned provincial departments. 

 

3 Presentations

 

3.1 National Treasury

 

The National Treasury reported that the adjusted budget for the 2009/10 financial year was R1 486 billion, with a projected outcome of R1.5 billion. The National Treasury added that actual payments as at 31 December 2009 was R841 million or 57 per cent of the adjusted budget. The National Treasury presented that the budget for this grant was adjusted upwards by R353.2 million in the 2009/10 financial year. Furthermore, the National Treasury added that at the end of the third quarter two provinces, Free State (R20 million) and Western Cape (R80 million), had projected to over-spent by R100 million. However, the National Treasury warned that over-spending in schedule 5 grants was not allowed. The National Treasury further reported that three provinces, namely: Gauteng (R17 million) Limpopo (R19 million) and Mpumalanga (R9 million), had projected to under-spent by R45 million. 

 

The National Treasury outlined that provincial departments of Public Works are responsible for the payment of municipal property rates for all departments in a province and that the failure to perform such function may lead to termination or disruption of services such as water and electricity in schools and hospitals. The National Treasury reported that outcomes for this grant have deteriorated since the 2008/09 financial year, where under-spending was approximately R202 million. However, the National Treasury commented that spending on this grant is highly reliant on the rating and billing capacities of municipalities. The National Treasury commented that poor municipal property management, poor billing systems, and late billing negatively affect the province’s ability to meet its obligations. Furthermore, the National Treasury said that provinces with former “homeland” government structures within their jurisdiction are particularly negatively affected due to the incomplete rating of properties in these areas. The National Treasury concluded that reasonably accurate baselines going forward are essential before the devolution process can be completed.

 

3.2 The Province of Western Cape

 

The Western Cape’s Provincial Department of Public Works (PoWC) reported that during the 2009/10 financial year its main budget was R165 million. The PoWC informed the Committee that in the 2008/09 financial year there was a shortfall of R38 million and in the 2009/10 financial year it had a shortfall of R66 million. The PoWC further reported that the total budget for the 2009/10 financial year was R269 million, whereas the total amount that was transferred was R250 million. The PoWC added that it had accrued R7 million and above that it had a surplus of R12 million.

 

The PoWC reported that during the 2008/09 financial year a total of 1 881 accounts payable to the value of R185 million were earned from municipalities, but only R147 million was paid, resulting in a shortfall of R38 million. The PoWC reported that the provincial Government of Western Cape was currently in the process of acquiring additional sites for health and educational purposes and that this will result in additional property rates expenditure.

 

The PoWC presented that no funding was transferred to it to create the additional administrative capacity to manage the devolution of property rates payments. The function was performed by 2 permanent staff members and 4 contract personnel.

 

On why the PoWC under-spent, the PoWC explained that there was late submission of accounts by the City of Cape Town (CoCT) due to the process of splitting rates and utility accounts. The PoWC added that late payments of accounts and accrual of interest led to under-spending. As a way of trying to address the situation, the PoWC reported that it added more hours in work to avert potential late payments and under-spending. Furthermore, the PoWC said that monthly meetings with the CoCT on outstanding accounts were held. The PoWC further reported that there was a potential to under-spend due to late billing by municipalities. The PoWC emphasized that there was a regular follow-up procedure with municipalities on outstanding accounts. The PoWC further reported that it liaised timeously with the Provincial Treasury and the National Department of Public Works on potential allocation shortfall.

 

The PoWC emphasized that delays in finalisation of transfer of new sites for education and health purposes have a potential to influence under-spending for the 2010/11 allocation. However, the PoWC said that timeously follow-ups with various role-players to ascertain status of these transfers will be done.

 

3.3 The Province of Limpopo

 

The Limpopo’s Provincial Department of Public Works (PoL) reported that it received a grant of R12 million to pay for the devolved rates and taxes from the National Treasury for the 2008/2009 financial and R14 million for the 2009/2010 financial year. The total number of devolved properties was 3 557.

 

The PoL reported that the provincial Government of Limpopo through Executive Council decision number 59 of 2001, decided that payments of rent, water, electricity and rates be paid for by individual departments for the buildings they occupied. Therefore, the PoL said that, since 2001, the National Department of Public Works did not pay for rates to municipalities on land parcels where respective provincial departments resided. The National Treasury said that the National Department of Public Works only paid for rates to municipalities on state buildings jointly occupied by provincial departments and where the provincial department of Public Works wholly occupied the building.

 

With respect to data trends, transfers and actual spending, the PoL reported that the 2010/2011 financial year marks the third year for the PoL to manage the payment of rates and taxes for devolved properties. The PoL said that the previous two financial years did not provide it with the confidence to determine patterns and trends in funds allocation and spending. The PoL added that the collection of data in the coming years will afford the PoL with the means to determine trends that will assist with projecting allocations and spending. The PoL added that efforts that were put in place for improvement were both administrative and political initiatives.

 

With respect to monitoring, the PoL reported that, at political level, the Member of Executive Council (MEC) engaged councilors and mayors including fellow Members of the Provincial Legislature (in Limpopo) on various occasions like the Premier/Mayors’ Forum, Inter-governmental Forum and some ad-hoc meetings.

 

With respect to administration, the PoL said that officials interacted with officials responsible for municipalities at the provincial level and, at district level, individual municipalities were met with to reconcile their accounts. The PoL reported that figures indicated that the change in approach resulted in increased spending from 54 per cent to 59 per cent over the two-year period. The PoL said that the 4 per cent improvement was encouraging and it led to intensification of aggressive turnaround strategy.

 

Furthermore, the PoL reported that it experienced many challenges since the inception of the devolution of property rate funds grant. The PoL’s reported challenges included:

·         The identification of devolved properties per region per municipality; collection of bills from municipalities;

·         The exclusion of consumption and arrears from municipality bills;

·         The Interfacing Bass system and the iE-Works System;

·         The Reduction of system errors on iE-Works;

·         The Lack of Real Estate Human Resources capacity;

·         Bills had opening balances from previous years;

·         High interests charged due to late payments; and

·         The monitoring capacity of the department for the 2009/2010 financial year was not adequate in terms of warm bodies.

 

The PoL reported that these challenges presented the following risks:

  • Properties not valuated;
  • Properties sharing the same ERF number but in different plots;
  • Wrong rebates and tariffs in the system;
  • Double payments;
  • Wrong bills from municipalities;
  • Properties without account numbers; and
  • Cross-boarder properties.

 

The PoL reported that, due to these challenges and risks, a new initiative had been undertaken to document, plan and execute a Devolution of Rates and Taxes Project. The PoL said that the scope of this project was limited to the 3 557 properties devolved from the National Department of Public Works. The PoL added that the project involves real estate and finance users at head office and regions. The PoL informed the Committee that the Government Information Technology Officers’ (GITO) directorate will manage the project and provide the Information and Communication Technology (ICT) infrastructure support. The PoL said the project scope covers, amongst other things, the devolution of rates and taxes properties limited to 3 557 as provided. The PoL reported that the district will continue identifying and verifying properties in the devolution list. The PoL said that payment of rates and taxes in the devolution list will be prioritized. The PoL added that real estate managers at the regional level will champion the project. Furthermore, the PoL reported that the finance directorate’s resources will be available to authorize payments in the iE-Works system in each region/district and the ICT resources will be available to support users.

 

The PoL reported that, whilst it was busy restructuring to ensure that capacity was increased to address the shortcomings, the interim project structure was being established with key roles and responsibility.  The PoL presented that the project structure was not the organizational structure of its department and that the ranks and responsibilities of the officials on the organization structure of the department remained the same as authorized by the accounting officer (the Head of Department) and human resources section. The PoL reported that monthly meetings and quarterly meetings were held with the South African Local Government Association (SALGA) as part of the turn around plan. The PoL added that it anticipated that the project will be successfully implemented. The PoL added that one of the critical success factors was that the 2001 Executive Council decision had been rescinded and that that enabled the PoL to be fully responsible for the payments of rates and taxes for the entire provincial property portfolio. Furthermore, the PoL commented that it hoped that interaction with other stakeholders will improve and lead to good governance.

 

3.4 The Province of the Eastern Cape

 

The Eastern Cape’s Provincial Department of Public Works (PoEC) reported that factors contributing to under-spending included incorrect invoicing by municipalities; invoicing by municipalities on properties not owned by the province; the municipal financial year (1 July to 30 June) differs from that of the province (1 April to 31 March) as a result municipalities submit bills late; and the late transfer of conditional grant funds to the Province.

 

The PoEC reported that the first transfer of the conditional grant for the 2009/10 financial year was received in the last week of September 2009 and the last transfer in February 2010. The PoEC presented that the financial management capacity in the municipalities of the Eastern Cape remains a challenge. The PoEC added that the conditional grant did not provide for operational or administrative costs for the implementation of the grant. The PoEC reported that confirmation of the roll-over approval and additional allocations per the adjustments budget process reached the provincial department late (that is December 2009) in the 2009/10 financial year.

 

The PoEC reported that payments made in the 2008/2009 financial year have not been credited to the PoEC’s accounts. The PoEC further reported that it was invoiced on private properties, properties owned by the National Department of Public Works, and property owned by the municipalities. The PoEC further reported that there were differences between schedules and actual invoices submitted. The PoEC explained that schedules from municipalities reflect amounts owed to be R83 million and invoices submitted amounted to R99 million in the 2008/09 financial year. The PoEC said that amounts still outstanding amounted to R6 million and amount paid was R79 million.

 

The PoEC alleged that it was being charged for the municipal services of the tenants in the properties and that these services are reflected on the rates and taxes invoices and municipalities have still not rectified these errors. The PoEC said that the municipalities are charging rates and taxes on un-surveyed land; municipalities can not provide supporting evidence for amounts reflected as outstanding but do not write off these amounts and then raise interest on the same amounts; the Devolution of Property Rates and Taxes Grant became effective on the 1 April 2008 for rates and taxes charged in the municipal financial year 1 July 2008 to 30 June 2009. The PoEC added that this transition from national to provincial was not effectively managed by municipalities as invoices were still sent to national. Furthermore, the PoEC reported that the outstanding balances due by the National Department of Public Works as at 1 July 2008 were not transferred to a separate account by municipalities but were charged to the PoEC. The PoEC reported that it was being charged interest on the outstanding balances of the National Department of Public Works at 1 July 2008.

 

The PoEC reported that municipalities continued to reflect R13 million as amount owed by the PoEC whereas it was an amount that is owed by the National Department of Public Works and that that included in this amount was an interest of R252 289 charged to the PoEC. The PoEC explained that these amounts had been excluded from the total outstanding by the PoL and the correct outstanding amounts for the 2009/10 financial year was R6 million. The PoEC said that this was subject to title deed verification and invoicing by municipalities and that excluded the municipalities for which no invoices had been received. The PoEC said that a further R12 million from the 2008/2009 financial year was to be spent, reducing the figure from R39 million to R28 million (or 23 per cent of unspent grant).

 

Furthermore, the PoEC reported that the total amount that was to be spent for the 2009/10 financial year was R32 million and R10 million for operational costs. The PoEC said that that was going to reduce the unspent figure from R117 million to R74 million (or 36 per cent of the unspent grant). However, the PoEC said that was subject to title deed verification and invoicing by municipalities.  The PoEC further reported that a request to rollover R96.7 million had been submitted.

 

The PoEC reported that the two interventions which seek to address the devolution of rate funds grant challenges are the Rates and Taxes project which seeks to address the backlogs and the Municipal Finance Unit which will work close with municipalities. The PoEC said that the Municipal Finance Unit will sustain the intervention in municipalities. The PoEC said that job advertisements were placed and recruitment of the deputy managers was complete and these managers will further staff the unit. The PoEC assured the Committee that the unit will be fully functional by the 30 September 2010.

 

The PoEC reported that, through the Municipal Finance Unit, it intends to facilitate the payment of rates and taxes for the 2008/2009 and 2009/2010 financial years through preparing invoices for payment; assisting municipalities in the preparation of invoices and supporting valuation certificates where municipalities were experiencing difficulty with resources; clearing outstanding reconciling items between the PoEC and the municipality concerned; and to establish the substantiated value of the amounts outstanding prior to the 1 July 2008. The PoEC added that supporting documentation for the value of the amount outstanding that relates to this period shall be obtained, verified and reconciled and that the PoEC was firm that where the amounts are unsubstantiated, agreement for write offs must be reached. Furthermore, the PoEC reported that it was intending to establish a new verified provincial immovable assets baseline for municipalities to charge rates and taxes.

 

The PoEC anticipates that the future benefits due to the above-mentioned interventions will include:

  • updated debtors’ information with the correct owner of the property; paid-up valid outstanding debtors’ balances for the period 2008/09 and 2009/10;
  • increased revenue base of municipalities with previously unknown provincial properties as per Pubic land data;
  • improved capacity at the municipality; improved communication channels between municipalities and Provincial Public Works Department;
  • corrected financial records that relate to rates and taxes of the provincial government;
  • transferral of knowledge and skill to municipal officials working with the project teams; and
  • acquisition of skills and experience by unemployed graduate working with consulting teams making them employable by municipalities.

 

3.5 The Province of KwaZulu Natal

 

The KwaZulu-Natal’s Provincial Department of Public Works (PoKZN) reported that its total budget for the 2009/10 financial year was R237 million, this amount included the budget allocation of R236 million and the roll-over from the 2008/2009 financial year of R1 million. The PoKZN reported that invoices received and payments made were to the amount of R237 million. However, the PoKZN reported that the invoices received totalled R459 million resulting in a shortfall of R221 million and that the unpaid invoices had to be held over for the 2010/11 financial year due to insufficient funds in the 2009/10 financial year. The implication was that the first charge for the 2010/11 financial year was R221 million, leaving a balance of R39 million out of R260 million which was allocated for the 2010/11 financial year.

 

The PoKZN reported that it had been confronted with service delivery challenges as municipalities had been threatening to cut services on accounts of the non-payment of property rates. The PoKZN asked for an advice from the Committee as to who is liable for the interest that has been charged on the overdue rates. The PoKZN was of the view that it should be the National Department of Public Works (NDPW) since the interest charge was as a consequence of insufficient funding. The PoKZN argued that, that was due to the fact that the PoKZN assumed the responsibility of the payment of property rates from 1 April 2008; all outstanding debt prior to that date should be the responsibility of the NDPW. The PoKZN reported that this was brought to the attention of the NDPW and an indication with respect to the payment of all outstanding debt to municipalities prior to the devolution (1 April 2008) was awaited from the NDPW. However, the PoKZN said that, in the mean time, the debt was likely to accumulate interest expense. The PoKZN reported that an additional funding of R221 million has been requested from the National Department of Public Works and the National Treasury, but no response had been received as yet. Furthermore, the PoKZN reported that the issue of new properties remains a challenge as the current model does not provide for new properties.

 

The PoKZN reported that many challenges have been experienced and that these challenges included:

  • provincial properties that are carrying arrears from the years prior to devolution of the property rates payment function to provinces;
  • properties where the ownership was unclear and had to be established between municipality, provincial and national custodians;
  • some municipalities disconnect services if rates are not paid or not fully paid;
  • property rates in a number of municipalities increased by between 300% to 1000% and more, for example in uMngeni, Umsunduzi, Richmond, KwaSani and Kokstad municipalities; and
  • the Ingonyama Trust Land properties have large tracts with numerous facilities on the parent property to which the municipality would attach a market value but the PoKZN is only responsible for the payment of property rates on state domestic facilities.

 

With respect to monitoring and capacity, the PoKZN reported that, when the payment of property rates was devolved to the provinces, the staff from the NDPW was not shifted together with this function and that that left a gap on how the conditional grant was to be implemented as this was a new function. Furthermore, the PoKZN reported that there was no funding provided for additional capacity to implement this function. Provincial asset management staff is currently performing the function.

 

The PoKZN reported that, in the 2009/10 financial year, the National Department of Public Works introduced a prescribed reporting format for provinces for monthly reporting. The PoKZN said that it submitted these reports every month to report progress on spending. The PoKZN reported that, while payments were happening at the four regional offices, there is central monitoring at head office to ensure that there was no over-spending or under-spending.

 

The PoKZN argued that it required additional funding because, if the first tranche was to be used to pay outstanding amounts, the remaining balance for the 2010/11 financial year will be R39 million which is too little compared to the budget required. The PoKZN reported that a number of municipalities had not been apportioned rate payments due to insufficient funding. However, the PoKZN added that all (except for two) municipalities were billing the PoKZN. The PoKZN stressed that, without additional funding, it will not be able to fulfil its mandatory obligations.

 

3.6 The Province of Northern Cape

 

The Northern Cape’s Provincial Department of Public Works (PoNC) reported that it had spent 99 per cent of its allocation for the 2009/10 financial year. The PoNC reported that the budget for the 2009/10 financial year was R27 million and that there was an additional amount of R10 million that was received during the adjustment budget period. The PoNC reported that, for the 2008/09 financial year, it had a shortfall of R4.7 million and that that had a negative impact on the departments’ spending. The PoNC added that it paid all municipalities except the R222 000 payable to the Thembelihle Municipality and that that amount was payable to the municipality but it was returned and the PoNC was investigating the matter as to why the money had been returned. The PoNC claimed that, after paying this amount, the PoNC will reflect 100 per cent spending.

 

With respect to monitoring, the PoNC reported that no funding was received to employ officials to perform devolution of rates function. The PoNC reported that it had no choice but to budget for three positions, Assistant Director; Senior Administration Officer; and Administration Officer. The PoNC said that that has assisted and strengthened its capacity to perform the function and produce reports. Monthly spending reports were submitted to National Department of Public Works. But, according to the PoNC, only capacitated municipalities submit monthly statements reflecting payments received.

 

The PoNC reported that they are experiencing challenges including that there were properties which are built on land that is owned by the municipality but the buildings, on the other hand, is owned by government. Once these properties were vested, the arrears and the recurrent costs for rates and taxes would be paid. The PoNC reported that ‘sister’ departments are not budgeting for rates and taxes for all new infrastructure developments. The PoNC reported that it was of the view that ‘sister’ departments should pay for new infrastructure. There are properties that were transferred from North Westprovince that must also be vested. The PoNC concluded that, due to budget under-allocation, municipalities are charging interest on arrear accounts.

 

3.7 The Province of Gauteng

 

The Gauteng’s Provincial Department of Public Works (PoG) reported that its 2009/10 adjusted budget was R401 million, and that, at the end of the financial year, the department had spent R231 million and had a difference R170 million.

 

The PoG argued that its under-spending emanated from a number of challenges, i.e. ten municipalities had sent their invoices except for Emfuleni and Kungwini municipalities; some properties were continually moving from one Council to another; municipalities themselves did not have all the information and town planners had to be consulted to get the correct information; there was a challenge regarding personnel capacity; municipalities were unable to identify ownership due to properties belonging to other provinces, different Institutions and the national government; municipal valuation roll out was not completed; and there was no automatic interfacing between Basic Accounting System and iE-works system. However, training of staff on utilization of iE-works system was a continuous exercise. The POG reported that service level agreements were being developed to enhance relationship management.

 

With respect to monitoring capacity, the PoG said that all payments to municipalities were based on asset register’s verified data; and joint payment allocation and reconciliation with municipalities. The PoG further reported that the Debt Committee’s meetings were held with Provincial Treasury and Municipalities in attendance.

 

The PoG reported that monthly spending report meetings were held between programme managers and the finance branch. The PoG further reported that quarterly senior management meetings were used to discuss performance of the various programmes. The PoG informed the Committee that the Executive Management committee also received monthly spending report from the Chief Financial Officer. The PoG said that the Head of the Department and Deputy Director-General of National Department of Public Works held an one-on-one meetings with individual managers from time-to-time to ensure accountability for service-delivery purposes. The PoG said that, at unit level, performance is monitored against operational plans. The PoG assured the Committee that monthly and quarterly infrastructure reports were sent to the Provincial and National Treasury. Furthermore, the PoG said that Project Management Resource Groups assisted in ensuring that performance happened at site level.

 

4. Observations

 

The Committee notes that certain provinces are struggling to settle the outstanding amount and the municipalities were owed by National Department of Public Works before the devolution of property rates function to provinces.

 

The Committee ascertained that conditional grant did not provide for provinces to employ people who are responsible for this function. Furthermore, the National Department of Public Works did not release officials who were responsible for this function to provinces. As a result, there is a challenge in most provincial departments when it comes to managing this function.

 

The Committee observed that PoKZN was allocated insufficient funds and it was unable to pay municipal rates and taxes.

 

The Committee notes that poor municipal property management, poor billing systems, and late billing negatively affect the province’s ability to meet its obligations.

 

5. Recommendations

 

Having considered the presentations on the spending on the Community Library Services grant by the National Treasury and the afore-mentioned provincial departments, the Select Committee on Appropriations recommends that the National Council of Provinces considers the following:

 

5.1   That the National Department of Public Works should assist provincial departments of Public Works in settling the accounts they are owing to municipalities.

5.2   That National Department of Public Works should explain to the House why it could not attend the hearing on the third quarter spending by the provincial departments of Public Works. This explanation should reach the House within 15 working days after the adoption of this report by the House.

5.3   That the National Treasury should discuss the possible assistance that can be given to the Province of KwaZulu Natal with respect to the devolution of property rates grant. 

5.4   That provinces should assist less capacitated municipalities to improve on property management, and on their billing system.  

 

Report to be considered.

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