ATC150311: Report of the Standing Committee on Appropriations on the Division of Revenue Bill [B5 – 2015] (National Assembly – Section 76), dated 11 March 2015

Standing Committee on Appropriations

Report of the Standing Committee on Appropriations on the Division of Revenue Bill [B5 – 2015] (National Assembly – Section 76), dated 11 March 2015

The Standing Committee on Appropriations (the Committee), having considered the Division of Revenue Bill [B5—2015] (National Assembly), referred to it on 10 March 2015 and classified by the JTM as a section 76 Bill, reports as follows:

 

1. Introduction

 

The Minister of Finance tabled the 2015 National Budget before Parliament on 25 February 2015 in line with section 27 of the Public Finance Management Act (PFMA), (Act 1 of 1999) and section 7(1) of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009 (the Money Bills Act). Section 7(3) of the Money Bills Act requires the Minister to include the Division of Revenue Bill as part of the tabled budget. Section 214(1) of the Constitution, 1996 (the Constitution) requires that every year a Division of Revenue Act (DORA) determines the equitable division of nationally raised revenue among the three spheres of government. This is intended to foster transparency and ensure smooth intergovernmental relations. The Intergovernmental Fiscal Relations Act, No. 97 of 1997 prescribes the process for the determination of an equitable sharing and allocation of revenue raised nationally. Sections 9 and 10 (4) of this Act set out the consultation process to be followed with the Financial and Fiscal Commission (FFC), including the process of considering recommendations made with regard to the equitable division of nationally raised revenue.

 

After the tabling of the Budget and subsequent engagement with the National Treasury, the Standing Committee on Appropriations received input from the Parliamentary Budget Office (PBO), the Financial and Fiscal Commission (FFC), and the South African Local Government Association (SALGA).

 

 

1. Allocations of the Division of Revenue Bill for the 2015 Medium Term Expenditure Framework

 

The President of the Republic of South Africa, His Excellency JG Zuma in the State of the Nation Address on the 12th of February laid out the state’s nine strategic priorities to be pursued for the year 2015. This will be in partnership with the private sector and all stakeholders. These are:

 

1) Resolving the energy challenge,

2) Revitalising agriculture and agro-processing,

3) Adding more value to our mineral wealth,

4) Enhancing the Industrial Policy Action Plan,

5) Encouraging private investment,

6) Reducing workplace conflict,

7) Unlocking the potential of small enterprises,

8) Infrastructure investment, and

9) Operation Phakisa, aimed at the ocean economy and other sectors

The 2015 Budget Review states that funding proposals support the long-term health of public finances with a series of revenue and expenditure measures to narrow the budget deficit and stabilise debt. These measures all contribute to the vision of the National Development Plan (NDP). The Budget also reflects the policy priorities contained in Government’s medium-term strategic framework (MTSF), which identify the key actions required to implement the NDP.

The National Treasury’s budget documents have since 2012 pointed out that a deterioration of the economic environment would warrant a reconsideration of expenditure and revenue plans. Economic growth has been revised down for the fifth consecutive year and is likely to remain below 2.5 per cent over the next two years. Despite the implementation of a spending ceiling, weak economic growth has produced a determinedly large budget deficit. The 2015 Budget asserts that while fiscal policy has supported the economy for the past seven years, this counter cyclical approach has reached its limits. The budget deficit is largely structural and cannot be reduced through a cyclical upturn in revenues. In response to this the budget makes the following proposals:

• Reduce the projected expenditure ceiling by R10 billion in 2015/16 and R15 billion in 2016/17. The proposed decreases in indicative baselines are allocated proportionately across national, provincial and local government, according to their share of national revenue;
• Increase personal income tax rates and the general fuel levy, raising a net additional R8.3 billion in 2015/16;
• Strengthen budget preparation and expenditure controls to improve efficiency of resource allocation and the composition of spending;
• Withhold additional resources for changes to personnel numbers;
• Ensure that the financing of state-owned companies does not increase national government’s budget deficit.

The slowdown in spending growth is less pronounced in 2015/16, with the weight of expenditure consolidation shifted to the second year of the framework. The 2015 Budget provides that development finance institutions are expected to expand their loan books by 33 per cent over the next two years to support the economy. Furthermore, in addressing the energy constraints the state will seek to guide the economy towards a less energy intensive path and in the short term institute measures to ensure predictability in electricity supply. 

The Minister of Finance tabled the 2015 National Budget together with the Division of Revenue Bill [B5-2015] on 25 February 2015. The Constitution sets out specific criteria for the sharing of nationally raised revenue between national, provincial and local spheres of government. The constitutional principles taken into account when deciding on the Division of Revenue include the national interest, provision of debt costs, national government’s needs and interest, provincial and local government basic services, fiscal capacity and efficiency, developmental needs, economic disparities, obligations in terms of national legislation, predictability and stability; and flexibility in terms of responding to emergencies.

The Minister in his 2015 budget speech indicated that South Africa’s budget is constrained by the need to consolidate public finances, in the context of slower growth and rising debt. For the country to attain the objectives of the National Development Plan, the state and all sector partners must intensify efforts to address economic constraints, improve growth performance, create work opportunities, broaden economic participation, and contain expenditure. The 2015 budget is aimed at rebalancing fiscal policy to give greater impetus to investment, to support enterprise development, to promote agriculture and industry and to make the country’s cities engines of growth.

The Division of Revenue Bill classifies schedules from Schedule 1 to 7 (equitable share and conditional grants) in order to divide revenue between the three spheres of government. Table 1 below provides the legal division of nationally raised revenue among these three spheres of government.

Table 1: Division of Nationally Raised Revenue among the National, Provincial and Local Spheres of Government

Spheres of Government	Column A	Column B
	2015/16	Forward Estimates
		2016/17	2017/18
	R'000	R'000	R'000
National1.	789 463 526	851 811 074	936 457 697
Provincial	382 673 477	405 264 594	428 892 540
Local	50 207 698	52 868 706	55 512 141
TOTAL	1 222 344 701	1 309 944 374	1 420 862 378

1. National share includes conditional allocations to provincial and local spheres, general fuel levy sharing with metropolitan municipalities, debt-service costs and the contingency reserve. Direct Charges for provincial equitable share are netted out.

 

In the 2015/16 financial year, baseline reductions have been effected across all three spheres of government, resulting in slower real growth relative to the 2014/15 financial year. The Division of Revenue proposals state that the most important public spending programmes that help poor South Africans, contribute to growth and generate employment have been protected from major reductions. In particular, the 2015 division of revenue reprioritises existing funds to ensure these objectives are met despite a lower expenditure ceiling. The lower spending ceiling has been applied proportionately across the three spheres of government.

2.1        Main Budget Allocations

 

The main budget expenditure has increased from R1.1 trillion for the 2014/15 financial year to R1.2 trillion for the 2015/16 financial year. This marks an increase of
R87.2 billion or 7.7 per cent from the 2014/15 financial year. The main budget framework provides for average annual growth of 8 per cent in the main budget allocations over the next three years. Non-interest allocations for the three spheres of government grow at an average annual rate of 6.5 per cent over the Medium Term Expenditure Framework (MTEF). Growth in non-interest allocations is faster than projected inflation. For the 2015 MTEF, national government is allocated 47.9 per cent of available funds after debt costs and the contingency reserve have been provided for, provincial government is allocated 42.9 per cent of available funds and local government is allocated 9.1 per cent of available funds. The main budget for the 2015 MTEF will remain within the bounds set out in the main budget ceiling of 2013.  

 

 

 

Table 2: Division of Nationally Raised Revenue, 2011/12- 2017/18

Source: National Treasury 2015

In terms of the composition of expenditure, compensation of employees budget is expected to increase at 6.6 per cent annual and wage negotiations are underway. The 2015 Budget asserts that agreements that protect workers’ purchasing power should support a sustainable wage bill. Goods and services grows at 5.1 per cent annually and critical items such as medicines grow faster than inflation. Payments for capital assets grow by 8.9 per cent a year and is the fastest-growing category of expenditure apart from debt service.

Main budget expenditure for the 2013/14 financial year was R1.0 trillion from an adjusted appropriation of R1.1 trillion. This was the same level of spending performance as in 2012/13 with only 0.6 per cent underspent. This is an improvement compared to the 1.1 per cent underspending in 2011/12. The main contributors to the national government’s under-expenditure were infrastructure programmes in health and education.  The expenditure outcome in the social grant programme was
R1.4 billion under budget following the cleaning of the grant system by the South African Social Security Agency.

 

 

 

 

2.2        National Allocations

 

The main budget framework provides for growth in allocations for National Departments from R523 billion in 2015/16 to R553.8 billion in 2016/17 and reaches R586.1 billion in 2017/18. There is an increase in indirect grants from R12.7 billion in 2014/15 to R13.9 billion in 2015/16. The increase in funding for indirect grants is to allow national government to spend on behalf of other spheres of government and ensure service delivery takes place while they develop more institutional capacity. The 2014 Budget Review stated that in the long term, when provinces and municipalities have improved capacity, the indirect grants will be converted back into direct grants. The DORA frameworks for indirect grants require that national departments submit skills transfer and capacity building plans and report on progress against these plans at the end of the financial year.   

The 2015 Budget includes baseline expenditure reductions in the first two years of the 2015 MTEF relative to the projected budgets announced in the 2014 Budget. These reductions include:

• Reductions to current spending by national departments of R2.3 billion in 2015/16 and R3.9 billion in 2016/17, to be achieved mainly through decreases in budgets for non-core goods and services.
• Reductions to capital spending of national departments by R280 million (2015/16) and R911 million (2016/17), mainly on non-critical items of machinery and equipment.
• Reductions in allocations to public entities of R2.4 billion (2015/16) and R2.6 billion (2016/17).
• Reductions in transfers to provinces of R4.4 billion (2015/16) and R6.6 billion (2016/17).
• Reductions in conditional allocations to local government of R921 million in 2015/16 and R1.4 billion in 2016/17. No reductions were made to the local government equitable share.

Other measures to contain costs include ensuring that Accounting Officers fulfil their roles as primary drivers of maximising value for money in the use of public resources. Proposed tools include expanding the Treasury Instruction note’s limits on cost containment, the Chief Procurement Office’s establishment of an e-Tender portal which will be available for national and provincial use from 1 April 2015 and for local government from 1 July 2015 and a national price-referencing system which is also to be rolled out on 1 April 2015.

 

2.3        Provincial Allocations

 

Provinces are allocated R382.7 billion through the provincial equitable share and a further R85.5 billion through conditional grants in the 2015/16 financial year. The provincial equitable share allocation increases by R22.4 billion or 6.3 per cent from a revised estimate of R360 billion in 2014/15. Over the MTEF the provincial equitable share increases from R382.7 billion in the 2015/16 financial year to R405.3 billion in the 2016/17 financial year and reaches R428.9 billion in 2017/18.

 

For the 2015 MTEF, two function shifts and a change to the National Health Laboratory Service (NHLS) funding arrangements will be effected. The further education and training colleges and adult basic education function is shifted from provinces to the national Department of Higher Education and Training. Therefore, the total allocation of the further education and training colleges grant (R8.9 billion over the MTEF period) and R7 billion from the provincial equitable share are shifted to the National Department of Higher Education. The port health function is transferred from provinces to the national Department of Health, resulting in a total of R380 million shifting from the provincial equitable share to the national department’s budget over the 2015 MTEF.

 

The NHLS funding arrangements are being amended so that national functions for training and research are funded directly by the National Department of Health from 2015/16, and no longer paid for through fees charged to provinces for NHLS services. To ensure this change does not affect provincial budgets, an audit will be conducted after the first year to ensure that the change in revenue is neutral for the provinces.

 

 

Table 3: Determination of each province’s equitable share of the provincial equitable share of nationally raised revenue

 

Source: National Treasury 2015

 

Table 3 (above) shows the horizontal allocation of the provincial equitable share across all nine provinces. As shown in Table 3, for the 2015/16 financial year, KwaZulu-Natal Province received the highest share of R82.3 billion or 21.5 per cent followed by the Gauteng Province with R73.4 billion or 19.2 per cent, the Eastern Cape Province with R54.3 billion or 14.2 per cent and the Limpopo Province with R45.4 billion or
11.9 per cent. Western Cape receives R38.2 billion or 10 per cent, North West receives R26.2 billion or 6.8 per cent, Free State receives R21.8 billion or 5.7 per cent and the Northern Cape receives R10.1 billion or 2.6 per cent.

 

This slower growth in budgets has affected the composition of spending in provinces. Cost-saving measures put in place resulted in goods and services declining from
19.2 per cent of provincial budgets in 2010/11 to 18.7 per cent in 2013/14, and unauthorised expenditure decreasing by 65 per cent between 2009/10 and 2013/14. The 2015 Budget states that additional ways to reduce costs in provinces will include mechanisms such as requiring textbooks to be returned at the end of the school year so that only unusable textbooks are replaced in the following year.

 

The share of provincial budgets taken up by compensation of employees increased from 58.4 per cent to 59.9 per cent between 2010/11 and 2013/14. Whilst compensation budgets have increased by more than inflation, provinces have managed this cost escalation by reducing the number of public servants where it will not impact on service delivery. The number of provincial entities has also been reduced from 101 in 1999 to 52 currently. During the 2015 MTEF cost-saving measures to be explored include introducing a new framework to govern remuneration within these agencies.

 

Table 4: Conditional Grants to provinces 2014/15 to 2017/18

 

Source: National Treasury & Own Calculations

 

Notwithstanding the baseline reductions, overall growth in direct conditional transfers to provinces averages 6.9 per cent over the 2015 MTEF period. For the 2015 MTEF period, R149 million has been reprioritised from the provincial roads maintenance grant to South African National Roads Agency Limited (SANRAL) for the delivery of the Moloto Road infrastructure project. Moloto Road will form part of SANRAL’s non-toll road portfolios.   

 

The 2015 Budget provides for significant growth allocations in a number grants critical to protecting the poor such as the Comprehensive HIV and AIDS grant, Education Infrastructure grant, Community Library Services and Social Sector Expanded Public Works programme. The Committee notes with concern minimal growth in the Schools Infrastructure Backlogs grant, the Comprehensive Agricultural Support Programmes. Other direct grants that will be phased out include the Occupational Specific Dispensation Grant as from 2016/17 provinces will make provision for the compensation of the qualifying education therapists, counsellors and psychologists from their equitable share allocations. 

 

Government introduced incentive based planning requirements in 2013/14. Therefore 2015/16 is the first year wherein incentive funds were awarded.  Provinces needed to obtain a minimum score of 60 per cent to qualify for the incentive. While six provinces qualified for the incentive, the Free State, Limpopo and Mpumalanga did not qualify and obtained scores below 60 per cent. Notwithstanding, the Committee notes that provincial infrastructure spending performance has continued to improve with
92.9 per cent of infrastructure budgets spent in 2013/14 up from 84.7 per cent in 2010/11.

 

2.4        Local Government Allocations

 

Municipalities are allocated R99.8 billion or 9.1 per cent of the nationally raised revenues in the 2015/16 financial year which includes conditional grants and the sharing of the general fuel levy. The local government equitable share increases by
R6.9 billion or 16 per cent from a revised estimate of R43.3 billion in the 2014/15 financial year to a budget allocation of R50.2 billion in 2015/16. Over the medium term the local government equitable share increases to reach R55.5 billion in 2017/18. No reductions are made to the local government equitable share, which continues to experience substantial growth in real terms in 2015/16. This protects the main source of funding for free basic services in municipalities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 5: Conditional Grants to local government 2014/15 to 2017/18

 

Source: National Treasury 2015 & Own Calculations

 

The baseline allocation for some local government conditional grants decreases marginally in the 2015 MTEF. The reductions in 2015/16 range between 0.9 per cent and 5.5 per cent of the allocation for each grant, with larger reductions on slow-spending and non-infrastructure grants. This spending growth coupled with above inflation increases in bulk water and electricity costs will mean that municipalities will have to reduce spending on non-core items and renew their focus on delivering basic services. Moreover, National Treasury submitted that inflation increases in the bulk costs of electricity and water have been fully funded in the equitable share. 

 

The 2015 Budget MTEF proposals provide for significant growth in allocations in the direct and indirect grants for Municipal Water Infrastructure and Integrated National Electrification programme grants. In addition there is a new municipal demarcation transition grant for the additional institutional and administrative costs arising from municipal mergers due to come into effect after the 2016 local government elections.

 

The Bucket Eradication Programme grant was introduced in 2014/15. This indirect grant was a special two year allocation to accelerate the eradication of bucket sanitation and will end in 2015/16. The indirect grant component of the Rural Households Infrastructure Grant is expected to end in 2015/16. It is expected that the structure and allocations for grants from 2016/17, will be amended in line with the on-going work of the Review of Local Government Infrastructure Grants.

 

The National Treasury together with the Department of Cooperative Governance, Department of Planning, Monitoring and Evaluation, the South African Local Government Association, and the Financial and Fiscal Commission, is conducting a review of the local government infrastructure grant system. Reforms emanating from the review and incorporated from 2015/16 onwards include amending the rules within the Municipal Infrastructure Grant to allow funds to be used to refurbish and replace infrastructure. Maintenance should be budgeted for and increased as part of standard municipal operations to meet minimum requirements.

 

In addition, the number of conditional grants will be reduced to ease the burden of grant reporting. In particular, two public transport grants will merge in 2015/16 into a single public transport network grant. The number of water and sanitation grants is also likely to be reduced from 2016/17. The next phase of the review will likely see the additional consolidation of infrastructure grants to municipalities and further restructuring of individual grants so as to respond to the often varied challenges facing the different types of municipalities.

 

2.5        Main Changes to 2015 Division of Revenue Bill

 

The 2015 Division of Revenue Bill introduces a renewed emphasis on reprioritisation within the existing fiscal envelope so as to ensure that the state’s policy objectives are met despite a lower expenditure ceiling. The provincial fiscal framework remains largely unchanged except for function shifts or funding shifts while the local government fiscal framework places focus on accelerating infrastructure investments for basic services and reforms in cities’ spatial development. Overarching policy issues considered and adjusted into the 2015 Division of Revenue which seek to support cities to increase their contribution to infrastructure development include:

 

• Modifying the infrastructure grant system by reducing the number of grants, introducing more flexible grant conditions and increasing the certainty of transfers over a longer time period. There will be support for the development of mixed-use/mixed-income precincts. 
• Refocusing the Neighbourhood Development Partnership Programme to support the development of economic hubs in large urban townships.
• Reforming the system of development charges to improve fairness and transparency, and reduce delays in infrastructure provision for private land developments.
• Reviewing the sustainability of existing own-revenue sources for metropolitan municipalities.
• Expanding opportunities for private investment in municipal infrastructure through the Development Bank of Southern Africa increasing its origination of longer-term loans and develop innovative new financing instruments.

 

 

2.6        Technical Corrections

National Treasury brought to the attention of the Committee that there was an allocation error for the 2015 MTEF allocations for the Municipal Disaster Recovery Grant. The allocations were included in Annexure W4 to the Division of Revenue Bill which was tabled on 25 February 2015. Following the tabling of the Bill, the Provincial Disaster Centre in Mpumalanga notified the National Disaster Management Centre of the error in allocations to the receiving municipalities. The National Disaster Management Centre formally notified National Treasury on the 3rd of March 2015 and requested that instead of reflecting an allocation of R10 million in 2015/16 for Umjindi Local Municipality, the allocations in 2015/16 should reflect R4.6 million for Umjindi Local Municipality and R2.6 million for Bushbuckridge Local Municipality and the remaining R2.8 million should be reflected as unallocated.     

 

Given that allocations to municipalities for the Municipal Disaster Recovery Grant are contained in the annexures of the Bill and thus will only have legal force once gazetted by the Minister of Finance in terms of Section16(1) of the 2015 Division of Revenue Act (once enacted). It is then possible to have these changes in the allocations made before they are gazetted so as to ensure that only the correct allocations are gazetted.  National Treasury thus requested that Parliament agree to the change and allow National Treasury to gazette the correct allocations for the Municipal Disaster Recovery Grant.

 

3.         Stakeholder Inputs on the 2015 Division of Revenue Bill

 

National Treasury briefed the Committee on the 2015 Division of Revenue (DoR) Bill. Other stakeholders invited to comment on the 2015 DoR Bill were the Parliamentary Budget Office, the Financial and Fiscal Commission and the South African Local Government Association.

 

3.1        Parliamentary Budget Office

 

The Parliamentary Budget Office (PBO) in its submission was of the view that the 2015/16 budget was delivered amid difficult local and international economic conditions. The PBO indicated that social grant expenditure remained stable at 3 per cent of the Gross Domestic Product (GDP) and would be sustainable on the condition that the economy grew by 3 per cent a year. It has however reported that the adequacy of grants, the number of tax payers in relation to the grant recipients, and the current pace of economic growth (i.e. 2 per cent) in South Africa were major risks to the sustainability of grants in future.

The PBO noted the view that the 2015/16 budget was not balanced on the backs of the poor, however pointed out that there is no official definition of the poor in South Africa. Furthermore, the PBO reported that according to National Treasury there was uncertainty around the number of grant recipients in South Africa. It reported that there were particular vulnerable groups such as rural women, children; people living with HIV/AIDS and other diseases; the disabled and the elderly though some of the people under this classification may not necessarily be categorised as poor.

The PBO further reported on the elements benefiting the poor in the 2015/16 budget such as social grant increases, the exemption of the income tax increases on low income individuals, and the Value Added Tax (VAT) rate which remained unchanged. It however also alluded to elements which were not pro-poor such as the nominal increase in grants in relation to the current rate of inflation, increases in electricity tariffs, fuel and Road Accident Fund (RAF) levies, as well as the one year reduction in the Unemployed Insurance Fund (UIF) contribution which will not benefit the poor and unemployed.

With regards to allocations to the different spheres of Government, the PBO indicated that the allocations to provinces and municipalities grew slower than in the past. To this end, the PBO reported that there was a need for provinces to focus on finding efficiencies and cost savings in goods and services, personnel costs, and allocations to provincial entities. The PBO reported that a review of the conditional grants was undertaken in the 2014/15 financial year and has resulted in a number of changes and is set to continue in the 2015 MTEF. The PBO reported that it had undertaken an analysis of the technical and practical aspects of the 2014 conditional grants. Findings from the PBO analysis included concerns around the number of grants, duplication of services within grants with programmes, duplication of reporting, administrative challenges including the flow of grants and the quality of reporting. 

The complexity of the grant frameworks and the duplication of reporting results in a heavy administrative burden on provincial departments. In some instances, provincial education departments have had to create additional sub-programmes within each programme to manage the grants. Adding to the complexity of grant management and oversight, was the different process flows between the initial transfer and the implementation of the grant.

 

3.2        Financial and Fiscal Commission

 

In its submission, the Financial and Fiscal Commission (FFC /the Commission) commented that although there have been baseline reductions in revenue allocations across all three spheres of government, it welcomes Government’s balanced approach in protecting key service delivery areas while effecting cuts on non-core and inefficient spending areas. The FFC also supported the spending focus on social assistance programmes; however remained concerned about disparities in the funding of child welfare services and was of the view that Government should put in place proper funding models that prioritize welfare services in an equitable manner.

 

The FFC supported the FET and adult basic education and the port health function shifts; but stated that functions that are shifted through legislative amendments should be implemented alongside the requirements of the Financial and Fiscal Commission Act to avoid problems that could arise due to unfunded mandates. The FFC expressed concerns with regard to the phasing in of newly established conditional grants such as the Human Papilloma Virus into the Provincial Equitable Share (PES) in the absence of assessments that ascertain whether grant objectives have been achieved or not. FFC supported the phasing in of the Occupational Specific Dispensation for education sector therapists into PES and indicated that spending thereon by provinces should focus on sector priorities and not overspent on personnel.

 

The FFC was of the view that the downward revision of provincial health conditional grants should be preceded by expenditure reviews to determine the extent to which grant objectives are affected. The FFC was also concerned about the reprioritization of the National Health Grant infrastructure component to offset baseline reductions in the Comprehensive HIV and AIDS Treatment Grant, and the resultant impact thereof on the National Health Insurance reforms given its importance in funding existing and new health infrastructure. The FFC commented that streamlining of conditional grants such as that of the merger of the Dinaledi and Technical Secondary Schools grants should be extended to grants related to health infrastructure which in essence have the same objectives. Pertaining to the performance based allocation framework for provincial infrastructure conditional grants, the FFC was concerned about the inability of some provinces to meet the incentive threshold and proposed that the relevant departments together with National Treasury identify and address these underperformance challenges. The Commission was also of the view that the unallocated part of the incentive should be reallocated to other spending areas in the interim.

 

With regard to local government allocations, the FFC welcomed the cushioning of the Local Government Equitable share and infrastructure grants from cuts, as well as the significant growth in water, sanitation and electricity grants. The institutionalization of the Built Environment Performance Plan (BEPP) with regard to spatial development patterns of cities was also supported by the FFC. The FFC proposed extension of the BEPP requirement to other municipalities and other spheres of government with concurrent local function in order to facilitate integration between spending plans of sector departments and municipalities.

 

Notwithstanding improvements in municipal infrastructure grant performance, the FFC re-iterated that more efforts were required to improve the spending capacity and efficiency of municipalities. The FFC therefore remained committed in supporting and actively participating in the National Treasury-led infrastructure grant system review currently underway.

 

The FFC submitted that a significant proportion of economic infrastructure is undertaken by State Owned Enterprises (SOEs) such as ESKOM and Transnet. It highlighted the need to coordinate SOEs infrastructure plans with Municipal Integrated development plans. 

 

3.3        South African Local Government Association

 

Whilst the South African Local Government Association (SALGA) noted the difficult economic context and challenges experienced at especially the local government level, it welcomed the 2015 budget proposals. SALGA further reported that it was cognizant of South Africa’s slow rate of economic growth, the debt burden, and competing needs for limited resources however it indicated that it was in the country’s interest to ensure that proper resources were allocated towards local government.

 

SALGA noted that there was no baseline reduction in the local government equitable share. However the work on the equitable share is to be fully phased in by 2017/18 and that it would be updated in 2015 to reflect the new municipal boundaries that are scheduled to come into effect in 2016. SALGA further welcomed the various support measures provided to the cities in the 2015 budget but expressed concern at the
9.1 per cent of the fiscus which has been allocated to the local sphere of government as compared to the other spheres. SALGA was of the view that work on the review of the equitable share needed to continue so as to increase the share allocated towards local government since the current allocation was insufficient to enable local government to meet the growing demands. It was reported that a study has been conducted on the actual costs of providing electricity, water and sanitation in various municipalities in relation to the allocations and the outcome was that the Local Government Equitable Share allocation was substantially insufficient when compared to the actual costs to be incurred.

 

SALGA noted that the issue of state, households and private business indebtedness to municipalities continued to be a major challenge to municipalities and reported that it was also mindful of its responsibility to ensure better management of increased resources at local government and reported on a number of measures it will employ to assist in this regard. For instance, it will invest more in monitoring the performance and capacitation of municipal oversight structures such as Municipal Public Accounts Committees, Audit Committees and the Internal Audit functions.

 

SALGA provided an assessment of direct and indirect grants including the successes and challenges experienced and reported that it will continue working with National Treasury and the Municipal Infrastructure Support Agency and other entities to ensure requisite capacity in municipalities so as to ensure expenditure performance on grants. Furthermore, it reported that it welcomed the Built Environment Performance Plans (BEPP) process as introduced in the 2011/12 financial year but stated that more work needed to be done in terms of the implementation and coordination thereof. 

 

4.         Findings and Observations

 

Based on the above engagements by the Committee on the 2015 Division of Revenue Bill, the Committee found the following:

 

 

4.1.       The Committee notes that economic growth has been revised down for the fifth consecutive year. The 2015 Budget Framework states that while fiscal policy has supported the economy for the past seven years, this counter-cyclical approach has reached its limits. The budget deficit is largely structural and cannot be reduced through a cyclical upturn in revenues.

 

4.2        The 2015 Budget includes baseline expenditure reductions of R25 billion in the first two years of the 2015 MTEF as announced in the 2014 MTBPS. The slowdown in spending growth is less pronounced in 2015/16. Reductions were effected to current spending by government departments and these were achieved mainly through decreases in budgets for non-core goods and services.

 

4.3        Proposed measures aimed at further entrenching cost containment include expanding the Treasury Instruction Note’s limits on cost containment, the Chief Procurement Office’s establishment of an e-Tender portal which will be available for national and provincial use from 1 April 2015 and for local government from 1 July 2015 and a national price-referencing system which is also to be rolled out on 1 April 2015.

 

4.4        The Committee views efforts aimed at improving the composition of expenditure as critical levers in ensuring sustainability in our public finances. Capital remains the fastest growing item of non-interest spending over the medium term, with compensation budgets and goods and services budgets growing much slower. 

 

4.5        The Committee welcomes the government measures aimed at ensuring a more predictable pattern of scheduled power cuts for maintenance and accessible communications. Communication from Eskom and large municipalities will be critical and the Committee views predictability and stability as important for business and investment confidence. 

 

4.6        The Committee notes the increase in funding for indirect grants to allow national government to spend on behalf of other spheres of government and ensure service delivery takes place while it develops more institutional capacity. The Committee views the transfer of skills to provinces and municipalities as a policy imperative and is to closely monitor compliance with relevant DORA framework stipulations on skills transfer and capacity building plans.

 

4.7        The Committee acknowledges the utilisation of incentive grants in improving spending performance for provinces and municipalities. The Committee is of the view that provinces and municipalities currently not qualifying for such incentives should be supported so that they are not unfairly disadvantaged in future resource allocations. Furthermore, the Committee notes the proposed incentives for lead planning, but asserts that incentivising of performance and implementation should also be prioritised.

 

4.8        The Committee notes priority emphasis placed in the local government fiscal framework that supports cities to increase their contribution to infrastructure development.

 

4.9        The Bucket Eradication Programme grant was a special two year allocation to accelerate the eradication of bucket sanitation and will end in 2015/16. The indirect grant component of the Rural Households Infrastructure Grant is expected to end in 2015/16. The Committee views the provision of continued support to provinces and local government with regards to the phasing out of specific conditional grants as critical in ensuring the sustainable provision of basic services.

 

4.10      The Committee notes with concern the downward revision by R200 million of the Municipal Human Settlements Capacity Grant in 2015/16. This grant was introduced in 2014/15 to fund the six metropolitan municipalities that were due to be assigned the housing function though for now the process has been placed on hold. The Committee views the delivery of human settlements as part of implementation of the vision of the National Development Plan. 

 

4.11      The Committee supports the review of the local government infrastructure grant system currently underway, and is of the view that this will address not only the current fiscal and financial concerns but also the service delivery performance of municipalities and how they are dealing with the spatial, distributive, and economic challenges of their localities.

 

4.12      The Committee welcomes additional clauses to the Division of Revenue Bill which emphasize performance monitoring of grants as well as the substantiation requirement by transferring and receiving officers on the withdrawal or stopping of conditional grants. However, still maintains that withdrawal or stopping of conditional grants should not impede service delivery.

 

4.13      The Committee notes SALGA’s submission that the percentage share of local government’s equitable share be increased from its current level of 9 per cent as per the Division of Revenue. In addition, the Committee notes National Treasury’s submission that local government’s equitable share increased from around 6 per cent in 2006/07 to 10 per cent in 2015/16 if indirect grants are taken into account. It is the Committee’s view that service delivery outcomes at municipal level still need to show significant improvement in order to derive value for money for current investment within this sphere.

 

4.14      The Committee remains concerned at the revenue collection systems at local government level and the lack of a significant turnaround in municipal revenue collection. The Committee notes the submission by SALGA that additional legislative instruments be considered for municipal revenue collection. However the Committee believes that the current legislative framework and collection systems should rather be implemented and strengthened.

 

4.15      Whilst the Committee notes efforts by SALGA in improving critical municipal oversight structures such as MPAC Committees, Audit Committees and the Internal Audit function, it is concerned at the lack of consequence management by municipalities to deal with poor performance by officials. Furthermore, SALGA needs to become much more visible in the development agenda for improved local government. 

 

4.16      The Committee concurs with the Financial and Fiscal Commission’s view that there is a need for co-ordination between State Owned Enterprise, national and provincial government infrastructure plans and municipal Integrated Development Plans and views the Presidential Infrastructure Coordinating Council as key in the facilitation of this integration.

 

4.17      As stated in the Committee’s Report on 2014 Division of Revenue Bill; the Committee supports the institutionalization of the Build Environment Performance Plans (BEPPs). The Committee also notes the Financial and Fiscal Commission’s proposal regarding extension of the BEPP requirement to other municipalities and sector departments.

 

4.18      It is the Committee’s view that any measures to enhance planning should not duplicate existing systems and should seamlessly interface with current state systems and enhance in a tangible manner the effectiveness of planning. 

 

 

5.         Recommendations

 

The Standing Committee on Appropriations having considered the 2015 Division of Revenue Bill recommends as follows:

           

 

5.1        That the Minister of Finance should ensure the following:

 

5.1.1     That National Treasury, in conjunction with relevant national departments, validate that the process of phasing out all provincial and municipal conditional grants that are due to end in the 2015 MTEF or those that are due to be phased into the provincial and local government’s equitable shares does not compromise service delivery and the necessary support be provided to ensure that provinces and municipalities are able to absorb the adjustments.

 

 

5.1.2     That National Treasury strengthen systems and mechanisms aimed at ensuring the provinces qualify for incentives in infrastructure programmes for education, health and roads. Emphasis to be placed on provinces that have not qualified for incentive allocations in 2015/16.

5.1.3     That National Treasury gazette the correct allocations per municipality for the Municipal Disaster Recovery Grant with regards to the Mpumalanga province. 

5.1.4     That National Treasury develop systems and mechanisms to ensure that all state agencies settle their outstanding debts with municipalities, ESKOM, Water Boards and other state institutions timeously. This should also include municipalities settling their debts with other state agencies such as ESKOM, Water Boards and other state institutions. These systems should also entail credible and affordable billing and revenue collection elements.

5.1.5     National Treasury and relevant stakeholders explore systems and mechanisms that will encourage the utilisation of energy efficient methods in the delivery of government’s infrastructure programmes. This consideration should also be included in the review of the infrastructure conditional grants.  

5.1.6     National Treasury and relevant stakeholders to consider developing innovative incentives for utilisation in the provincial and local government fiscal frameworks and infrastructure planning systems aimed at enhancing infrastructure delivery and focused on three themes, namely:

• Promoting efficiency by ensuring that provinces and municipalities consider whether existing infrastructure can be used/upgraded before planning to build new infrastructure.
• The utilisation of Small Medium Business Enterprises.
• Localisation of all state infrastructure inputs.

 

5.2        That the Minister of Cooperative Governance and Traditional Affairs ensures the following:

 

5.2.1     Cooperative Governance and Traditional Affairs together with the Department of Planning, Monitoring and Evaluation, National Treasury, South African Local Government Association, Statistics South Africa and Department of Water & Sanitation develop systems and mechanisms aimed at improving local government infrastructure performance with specific focus on the following:

• Effective planning, monitoring and implementation in the provision of water and sanitation infrastructure services.
• The setting of measurable targets and attainable outcomes in the provision of water and sanitation infrastructure services.
• The development of automated monitoring and reporting systems that ensure quality non-financial performance information is reported.
• The development of guidelines for effective planning in rolling out roads infrastructure.
• Building credible data and information systems within municipalities especially with regards to service delivery programme outputs and infrastructure programme outputs.
• Ensure value for money in the provision of water, sanitation and roads infrastructure.

 

1. Cooperative Governance and Traditional Affairs develop systems and mechanisms aimed at improving local government infrastructure performance with specific focus on ensuring adequate implementation of appropriate consequences where there has been poor performance or transgressions.

 

6          Conclusion

 

The Standing Committee on Appropriations having considered the Division of Revenue Bill [B5—2015] (National Assembly) referred to it and classified by the JTM as a section 76 Bill, reports that it has agreed to the Bill without amendments.

 

 

 

Report to be considered.