ATC110622: Report on Third Quarter Spending on Devolution of Property Rate Funds Grant in 2010/11 Financial Year

NCOP Appropriations

Report of the Select Committee on Appropriations on the Third Quarter Spending on the Devolution of Property Rate Funds Grant in the 2010/11 Financial Year, dated 22 June 2011.

 

1. Introduction

The Select Committee on Appropriations (the Committee) convened a hearing on the spending levels on the Devolution of Property Rate Funds Grant for the third quarter of the 2010/11 financial year. This emanated from the provincial expenditure report published by National Treasury on 3 March 2011. 

 

The hearing took place on Tuesday, 24 May 2011, in Committee Room V119 at Parliament.

 

2. Terms of reference 

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

 

Provinces were requested to make oral presentations on the Grant and to take into consideration the following:

• Data trends in allocations, transfers and actual expenditure of the Grant for the third quarter of the 2010/11 financial year;
• Assessment of the department’s monitoring capacity for the financial year 2010/11, under-spending and what capacity constraints impacted on these outcomes;
• Whether monthly reports are received from receiving departments or municipalities, and if not, what are the departments doing to ensure compliance with monthly reporting; and
• The department’s spending plan on the Grant.

 

The Committee invited four provincial departments of public works (from Eastern Cape, Gauteng, Limpopo, and KwaZulu-Natal) and the national Department of Public Works (DPW). In addition, National Treasury was requested to make a presentation. All invited provinces honoured the invitation except KwaZulu-Natal.

 

3.  National Treasury

3.1 Spending trends

National Treasury highlighted the third quarter spending on this Grant, but also included the fourth quarter figures, as these had already been published.

 

Overall, provincial departments of public works had spent only 49.7 per cent of the total adjusted Grant budget by 31 December 2010. Gauteng, at only 0.5 per cent, had spent the least, followed by KwaZulu-Natal at 40.9 per cent, Eastern Cape at 47.4 per cent and Limpopo at 50.0 per cent.

 

There was a year-on-year improvement in overall spending of 29.7 per cent, with the Western Cape showing 296.4 per cent growth in spending, andMpumalanga 48.1 per cent. The year-on-year spending in two provinces had declined by 98.9 per cent in Gauteng and 2.8 per cent in the Northern Cape.

 

3.2 Challenges

Through the quarterly reports from provinces and the annual evaluation, National Treasury had identified the following issues that affect spending on this Grant:

 

3.2.1 Invoicing by municipalities

Municipalities were still experiencing challenges with timeous submission of invoices to provincial departments, specifically in the Eastern Cape, Gauteng,KwaZulu-Natal and the Northern Cape.

 

3.2.2 Asset registers

Provincial asset registers in respect of immovable assets were still not finalised in most provinces.

 

3.3 Actions needed to address challenges

3.3.1 Task team

National Treasury and the Department of Public Works had convened a task team to deal with the issue of registering and managing immovable government properties.

 

 

3.3.2 Inter-governmental forums

The progress made by certain provinces (notably the Western Cape and KwaZulu-Natal) with various inter-governmental forums between the province and municipalities must be assessed and there must be a transfer of best practices and lessons learned.

 

3.3.3 Project plans

It would be prudent for provinces to institute project plans, containing timeframes and augmented by progress reports, whereby the process of registering and valuing provincial properties could be addressed.

 

4. Limpopo Province

4.1 Third Quarter Spending

The provincial department of Public Works in Limpopo had a total adjusted budget of R15.154 million for the 2010/11 financial year. They province did not agree with National Treasury that they had only spent R7.577 million (50.0 per cent) of their budget at the end of the third quarter. They indicated that they had proved to the Provincial Treasury that the expenditure actually stood at R11.275 million (74.4 per cent) at the end of the third quarter. In response National Treasury indicated that they believed their figure of 50.0 per cent to be a true reflection of the spending as at 31 December 2010.  The Department was requested to revert back to the Committee within seven days of the meeting with the correct information on the disputed figure. The discrepancy had been a result of a system error which resulted in a payment to one municipality not being fully effected. Once the error was identified, the province attempted to correct the entry, however Provincial Treasury had already extracted the report from the Basic Accounting System (BAS). The provincial Department had managed to pay municipal rates for 658 of the properties. The outstanding properties had not been paid for the following reasons:

 

• 323 properties did not appear on their respective municipal valuation rolls
• 50 properties belonged to private individuals
• 785 properties had been transferred to community members
• 39 properties had not received municipal bills
• 23 properties’ bills had been received, but they did not tally with information that had been loaded on the iE-Works system
• 391 properties could not be processed due to insufficient budget.

 

 The province had spent R14. 730 million (97.2 per cent) of the budget by the end of the

  2010/11 financial year.

 

4.2 Challenges

4.2.1 Capacity of municipalities

The provincial department did not receive invoices from municipalities for all the properties on the list received from the national Department of Public Works. Where properties were being billed, incorrect invoices led to delays in payment by the department.

 

4.2.2 Asset register

In the 2008/09 financial year, a list of 3 557 properties had been devolved from the national Department of Public Works. Of this number, the DPW had only been paying bills for 869, while the balance of 2 688 properties had to be reconciled and verified. The reconciliation process had confirmed 2 269 properties. The rural nature of the province posed a major challenge to the process of asset re-identification and verification. In addition, there had been problems with the service provider who had been assisting in the process, and the matter was under arbitration.

 

4.3 Actions to address challenges

4.3.1 Coordination with municipalities

In order to address the key challenge of coordination between the department and the municipalities, a coordinating forum had been established. This forum was led by the provincial Local Government Department and included the provincial Public Works Department, Provincial Treasury, as well as the provincial Departments of Health and Education

 

4.3.2 Asset verification process

In order to avoid delaying progress by waiting for the legal process with the service provider to be completed, an alternative strategy had been devised to complete the asset verification process. The department had approached the provincial local government department for permission to make use of community development workers and ward committees. The department was in the process of designing a module for a one day workshop to train them and enable them to assist with the verification of the properties within their wards. The ward lists will be compared with the current asset register and properties not reflected accurately could be surveyed and valuated. The department had set itself the target of completing this process by the end of the 2011/12 financial year.

 

5.  Eastern Cape Province

5.1 Third Quarter Spending

The total allocation of R283.429 million to the provincial Department of Public Works included the amount of R135.962 million that had been rolled over from the previous year. Of this allocation, the province had spent R134.372 million (47.4 per cent) at the end of the third quarter. The Department had managed to pay municipal rates for 7 303 of the 14 632 devolved properties. The outstanding properties had not been paid for the following reasons:

 

• 467 properties belonged to the national Department of Public Works;
• 222 properties were privately owned;
• 692 properties were owned by municipalities;
• 386 properties were owned by the National Housing Board;
• The required documentation was awaited on 1 828 properties;
• 8 properties had not been billed for;
• 2 properties had no accounts;
• The payment for 49 properties were in the process of being made;
• 2 properties had been exempted from rates;
• 512 properties had not been valuated;
• 3 190 properties were unsurveyed;
• 2 properties belonged to the Department of Rural Development and Land Reform; and
• 8 properties the province had not been able to verify.

 

By the end of the financial year, R220.539 million (77.8 per cent) had been spent. The Department requested that the balance of R62.800 million be rolled-over to deal with the backlog of payments on certain properties.

 

5.2 Challenges

5.2.1 Capacity of municipalities

The financial management capacity of municipalities remained a challenge. This had led to various problems, including late, incorrect and manual invoicing and payments not being correctly allocated. Invoices also did not distinguish between rates and taxes and municipal services. In addition, the devolution took place based on an unaudited and unverified immovable asset base. The department was being invoiced for rates and taxes on private property, property owned by National Government and property owned by the municipalities themselves. These errors were not being corrected by municipalities and continued to reflect as debt-owed by the department. This had led to significant discrepancies between amounts reported as outstanding by municipalities and by the department.

 

5.2.2 Unsurveyed and unregistered land

The province experienced difficulty in the rural areas where most of the properties billed are located on unsurveyed and unregistered land. The Rates Act did not make provision for payment of rates and taxes on unsurveyed or unregistered land even though there were schools, hospitals and clinics on this land. The department required a legal opinion on whether it was liable for these payments.

 

5.2.3 Amounts due prior to devolution

When the function was devolved on 30 June 2008, there had been certain amounts due by the national Department of Public Works. Municipalities did not transfer these outstanding balances to a separate account, but charged them to the province.  The province was being charged interest on the outstanding balances of the national Department of Public Works as at 1 July 2008. The total outstanding amount claimed by various municipalities amounted to R10.678 million. However, this amount had not been audited and, as a result of factors like changes in management and billing systems, municipalities had not been able to present supporting documents to prove these outstanding amounts. As a result, some sort of intervention was required.

 

5.3 Actions to address challenges

5.3.1 Municipal Finance Unit

A strategically focused Municipal Finance Unit had been established and three managers and eight assistant managers had been appointed. The managers were supported by nine administrative officials. This unit was dedicated to all activities relating to municipalities. The province had been divided into three regions, with each manager dedicated to a group of municipalities and responsible for the resolution of queries, the processing of payments and the reconciliation of accounts.

 

 

 

5.3.2 Immovable Asset Register

The province was in an advanced stage of completing its Generally Recognised Accounting Practices (GRAP) compliant immovable asset register. Upon completion, the register would be handed over to municipalities and would -

·                     Facilitate the scientific calculation of the annual liability to municipalities;

·                     Facilitate accurate cash flow projections;

·                     Enable the department to apply for the correct annual appropriation; and

·                     Shorten the payment turnaround process due to reduced verification procedures.

 

6. Gauteng Province

6.1 Third Quarter Spending

Of the total allocation of R294.457 million for the 2010/11 financial year, the provincial Department of Infrastructure Development had spent only R1.475 million (0.5 per cent) by the end of the third quarter. By the end of the financial year, R213.336 million (72.5 per cent) had been spent. This represented a year-on -year decline in spending of 19.1 per cent. No invoices had been submitted during the financial year by the Lesedi, Nokeng Tsa Taemane and Westonaria municipalities, resulting in the R10.267 million that had been allocated to them being under-spent. In addition, no Grant funds had been allocated to the Kungwini Municipality, as the Department had not received any indication of what was due to this municipality.

 

6.2 Challenges

6.2.1 Capacity of municipalities

Municipalities often submitted invoices late, or not at all. In addition, incorrect billing occurred as a result of incorrect valuations of property. Informing municipalities of the mistakes and waiting on revised valuations resulted in late payment. The province had also given its projected expenditure figures to National Treasury based on submissions by municipalities, only to find that the invoices ultimately received were less than originally indicated by municipalities, leading to further under-spending.

 

6.2.2 Asset register

The asset register of the provincial department of infrastructure development was not up to date. Properties often did not match the department’s asset register although municipalities were certain that the properties belonged to the province. Furthermore, the list of devolved properties from the national Department of Public Works stood at 8 279 properties. Residential properties had however not been included on the list and were therefore not included in the rates and taxes invoices. 

 

6.3 Actions to address challenges

6.3.1 Improved inter-governmental relations

Various forums had been established to improve the cooperation with municipalities. There was continuous political engagement with municipalities through the Premier’s co-ordinating council, where SALGA was also represented. The chief financial officer (CFO) of the department met bi-annually with the CFO’s of the various municipalities. In addition, the head of the department regularly wrote letters to all municipal managers to urge them to submit invoices timeously.

 

6.3.2 Completion of asset register

The province was updating its asset register at the time and had set itself the deadline of 2014 for the completion of the asset verification process.  In terms of residential properties, a project was undertaken in conjunction with the national Department of Public Works, 753 residential properties had been registered thus far. Discussions were underway to include these on the devolved property list. The list would subsequently be sent to the respective municipalities for billing.

 

7.  National Department of Public Works

7.1 Spending

According to the national Department of Public Works, provinces had spent 78.0 per cent of the Grant allocation during the 2008/09 financial year. In 2009 provinces had been allowed to use about 4 per cent of the Grant for capacity building within the departments to manage the Grant.  In the 2009/10 financial year there had been an improvement of 1.0 per cent, bringing the expenditure to 79.0 per cent. The Department had expected a greater improvement in the 2010/11 financial year, and if one looked at the expenditure against the payment schedule for 2010/11, the provinces had spent almost 84 per cent of the budget. However, as the figure was influenced by the roll-overs received by provinces, the actual expenditure was only 78 per cent.

 

 

 

 

 

7.2 Challenges

7.2.1 Asset registers

According to the Department, there is not a focused, concerted effort in all provinces to establish a credible asset register, even though the Department had urged all provinces to budget for this.

 

7.2.2 Capacity of municipalities

Due to lack of capacity and inefficient billing systems, municipalities do not bill provinces effectively for rates and taxes. Provinces needed to provide assistance to municipalities in this regard.

 

7.2.3 Arrear rates and taxes 

According to the Department, the amount of money devolved was based on the properties that national had previously been paying for. Now new properties were being discovered by provinces and this created a challenge, as the Department did not have the extra cash to pay for these. National Treasury would have to be asked to assist in this regard.

 

7.2.4 Vesting and registration

The Department acknowledged that a number of provinces had been experiencing problems around the issue of vesting and registration. Legal intervention was required in cases where, for example, there were schools or clinics on land that belonged to a municipality and a province was expected to pay rates and taxes, even though the land was not registered.

 

7.3 Intervention strategies

7.3.1 Asset verification projects

All provinces needed to make a concerted effort to compile comprehensive, credible asset registers. Once the asset registers were complete and reconciled with the municipal valuation rolls, better projections would be possible, and the municipalities could be assisted more effectively. The Department was working closely with National Treasury to revise the sector guidelines. This would assist in standardising asset registers by providing consistency in defining properties.

 

7.3.2 Improved billing by municipalities

The Department was working closely with SALGA to assist low capacity municipalities. Some of the challenges, like retrospective billing, interest charges and unfair rates, had been escalated to the MINMEC meetings.

 

7.3.3 Provincial/ Municipal Debt Management Forum

The Department encouraged all provinces to actively participate in the Provincial/Municipal Debt Management Forums. It was within these forums that issues like the incorrect allocation of payments could be addressed.

 

7.3.4 Fast tracking of vesting process

A task team consisting of the national Department of Public Works, the provincial Departments of Public Works, the Department of Rural Development and Land Reform, the Deeds Office and the Surveyor-General had been established. This team is working to fast track the process. Although 32 contract workers had been deployed to the regional offices to assist with processing documents for vesting, this was not enough when one considered the backlog of properties to be registered. If the Department’s deadline of finalising the vesting process by 2013 was to be achieved, additional capacity would be required both within the Department and the Department of Rural Development and Land Reform.

 

7.3.5 Provinces to declare over-allocations

The Department had called a meeting with the CFO’s of all provincial departments to start a process whereby the budget would be reviewed timeously. A way had to be found for provinces to declare savings on time when they realised that they would be spending less than they had projected.

 

7.3.6 Improved reporting

The Department was engaged in a process to improve the way that provinces reported to the Department and to the national and provincial treasuries, in line with the Division of Revenue Act. This would serve to eliminate inconsistencies and to manage the Grant more effectively.

 

8. Conclusions

After interacting with the provincial departments of public works, the national Department of Public Works and National Treasury, the Committee concluded the following:

 

8.1 Low expenditure against this Grant is still attributed to challenges existing in the municipal sphere, such as low capacity within municipalities, incorrect invoicing practices related to the application of taxes and rates, late or non-submission of invoices and incomplete valuation rolls and property verification.

 

8.2 The lack of complete and credible asset registers in most provinces remains a contributory factor to the low expenditure on this Grant.

 

8.3 Some intergovernmental forums have proved successful in resolving some of the capacity issues at municipal level, which have resulted in improved expenditure, for example, KwaZulu-Natal and the Western Cape.

 

8.4 The issue of government properties such as schools and clinics etc. on un-surveyed unregistered land was brought to the attention of the Committee by the Eastern Cape provincial Department of Public Works. The problem is that the Rates Act does not make provision for payment of rates and taxes on properties that are located on unsurveyed or unregistered land and therefore the department is seeking a legal opinion on this matter.

 

8.5 Outstanding municipal bills prior to devolution of properties from the national sphere to the provincial sphere, has become problematic for some provinces, as their current allocations do not make provision for this outstanding debt.

 

9. Recommendations

 

Having considered the submissions by provincial departments of public works, the national Department of Public Works and National Treasury on the spending patterns on the Devolution of Property Rate Funds Grant in the third quarter of the 2010/11 financial year, the Select Committee on Appropriations recommends that the National Council of Provinces considers the following:

 

9.1 The national Department of Public Works should ensure that provinces institute project plans containing timeframes and submits progress reports on those projects, whereby the process of registering and valuing provincial properties could be addressed. The progress report should be submitted to the National Council of provinces within 120 days after the adoption by the House.

 

9.2 The national Department of Public Works should intervene and resolve the issue regarding outstanding municipal bills prior to devolution of properties.

 

9.3 The national Department of Public Works should take steps to ensure that best practices and lessons learned in improving expenditure by the provinces of the Western Cape and Kwazulu-Natal, are transferred to other provinces.

 

9.4 The Gauteng’s provincial Department of Infrastructure Development should submit to the House, a detailed Action Plan on how the Department will resolve the billing issue relating to municipalities that have been reported to the Committee to be “non-responsive”. They should further report on the billing issues in the Lesedi, Nokeng Tsa Taemane and Westonaria municipalities and specifically the non-allocation of grant funding to the Kungwini Municipality. These reports should be submitted to the National Council of Provinces within 60 days after the adoption of this report by the House.

 

Report to be considered.