ATC170620: Report of the Select Committee on Appropriations on the Urban Settlements Development Grant performance in the first three quarters of the 2016/17 financial year, dated 20 June 2017

NCOP Appropriations

Report of the Select Committee on Appropriations on the Urban Settlements Development Grant performance in the first three quarters of the 2016/17 financial year, dated 20 June 2017.
 

 1. Introduction

The Urban Settlements Development Grant (USDG) was introduced in 2011 and is allocated to metropolitan municipalities (metros) to supplement their capital budgets. The USDG is a Schedule 4B, or a supplementary, grant. This means that metros are expected to use a combination of grant funds and their own revenue to develop urban infrastructure and integrated human settlements. The Grant enables metros to better leverage their resources to develop sustainable human settlements, including the upgrading of informal settlements. The Grant funds the provision of basic municipal services to new housing projects and allows municipalities to plan and budget for both services and the construction of housing, once they attain authorisation for the human settlements function.

 

According to the National Treasury, the intended outcomes of the Grant are -

• The reduction in the real average cost of urban land for integrated development;
• An increase in the supply of well-located land for human settlements development;
• Improvement of spatial densities by providing household access to public amenities and socio-economic services;
• Household access to basic and reticulation services for poor communities and related infrastructure;
• Incremental improvements in security of tenure;
• Improved rates of household employment through skills development; and
• The transfer in the delivery of infrastructure.

 

 

2. Terms of reference 

As part of the Committee’s ongoing interaction with departments to monitor their spending patterns on conditional grants, the Department of Human Settlements, as well as National Treasury, were requested to make presentations on the performance of the USDG in the first three quarters of the 2016/17 financial year, taking into consideration the following:

 

• Data on trends in allocations and expenditure (over/under) since 2012, and specifically expenditure in the first three quarters of the 2016/17 financial year;
• How the Department has responded to the Department of Planning, Monitoring and Evaluation’s USDG evaluation findings, specifically the recommendation regarding the confirmation of the status of the USDG as a supplementary grant and how the findings impact on the broader review by National Treasury of local government infrastructure grants;
• Steps taken or progress made with regard to revising the monitoring framework of the USDG in order to standardise outputs, outcomes and performance indicators to enable comparative qualitative analysis of USDG expenditure; and
• Steps taken by the Department to improve monitoring capacity internally, to enable independent verification of metros’ performance reports.

 

The meeting to receive the above presentations and deliberate thereon took place at Parliament on 30 May 2017.

 

 3. Presentations by Department of Human Settlements and National Treasury

 

3.1 Allocations and expenditure since inception of Grant

 

3.1.1 Allocations and expenditure from 2011 to 2016

During the 2011/12 financial year, which was the first year of the USDG implementation, metros achieved expenditure of 90.3 percent on average. From the table below, it can be seen that this increased to 94.1 percent in 2012/13, and by the end of the 2015/16 financial year, the expenditure was as at an aggregate of 93.2 percent for the five year period.

 

Table 1: Total allocations and expenditure for all metros from 2011-2016

Financial year	Allocations and expenditure
	Voted funds	Roll-over	Total available funds	Spent	% Spent	Unspent funds
	R'000					R'000
2011/12	6 266 998	-	6 266 998	5 659 630	90.3	607 368
2012/13	7 392 206	607 368	7 999 574	7 526 160	94.1	473 414
2013/14	9 076 906	442 110	9 519 016	8 933 672	93.9	585 344
2014/15	10 284 684	584 692	10 869 376	10 104 970	93.0	764 406
2015/16	10 554 345	806 809	11 361 154	10 769 553	94.8	591 601
TOTAL:	43 575 139	2 440 979	46 016 118	42 993 985	93.2	3 022 133

 

 

3.1.2 Allocation and expenditure in first three quarters of current financial year

With regard to the 2016/17 financial year, from the table below it can be seen that USDG spending at the end of the third quarter amounted to R6 billion or 53.6 percent of the total available funds of R11.1 billion, which is well below the 75 percent expenditure norm.

 

The highest expenditure at the end of the third quarter was registered by the following metros:

• Buffalo City, at R510.1 million, or 69.7 percent;
• Mangaung, at R544.6 million or 69.5 percent;
• City of Tshwane, at R993.8 million or 64.4 percent; and the
• City of Johannesburg, at R1.01 billion or 54.4 percent.

 

The following metros registered the lowest expenditure by the end of the third quarter:

• Ekurhuleni Metro, at R815.5 million or 43.1 percent;
• eThekwini, at R1.02 billion or 45.4 percent;
• City of Cape Town, at R787.7 million or 50.2 percent; and

• Nelson Mandela Bay, at R439.1 million or 50.6 percent.

 

Table 2: USDG expenditure for the first three quarters of 2016/17

Municipality	USDG expenditure: 1 July 2016 – 31 March 2017
	Voted funds	Roll-over from 2015/16	Total available funds	Spent	% Spent	Unspent funds
	R'000					R'000
Buffalo City	731 499	-	731 499	510 132	69.7	221 367
Nelson Mandela Bay	868 282	-	868 282	439 164	50.6	429 118
Mangaung	725 003	58 644	783 647	544 689	69.5	238 958
Ekurhuleni	1 890 352	-	1 890 352	815 522	43.1	1 074 830
City of Johannesburg	1 775 809	94 984	1 870 793	1 017 418	54.4	853 375
City of Tshwane	1 539 334	-	1 539 334	993 847	64.6	545 487
eThekwini	1 885 685	-	1 885 685	856 694	45.4	1 028 991
City of Cape Town	1 423 504	145 319	1 568 823	787 731	50.2	781 092
Total	10 839 468	298 947	11 138 415	5 965 197	53.6	5 173 218

 

The Department reported that, although eThekwini had started slow in the current financial year, they did have big projects in the pipeline.

It was further reported that Ekurhuleni and the City of Cape Town had been under-performing for a number of years, and that the two municipal managers had been informed that allocations would be reduced if there was no improvement. The Department indicated that it had offered assistance to these metros to increase capacity to spend, but only Ekurhuleni took this offer up and two departmental officials are currently assisting in Ekurhuleni.

The Department reported that none of the metros were currently meeting targets, and that a clear policy would give direction and enable the DHS to impose sanctions. There was, however, reportedly a difference of opinion at national level around who may determine how the USDG is used. The Department wanted to give clear policy direction to ensure that metros use the Grant to promote integrated development; while National Treasury was of the view that metros should be allowed to make their own policy, as this is a supplementary grant.

 

3.2 Response to grant evaluation findings

The Department of Planning, Monitoring and Evaluation (DPME) undertook an evaluation of the design and implementation of the USDG, and published its findings on 17 March 2015. The motivation for evaluating the USDG design and implementation was based on the fact that the Grant was introduced without the adoption of a policy framework or defined programme theory. The purpose of the evaluation was thus to clarify the theoretical framework of the Grant and to refine and improve its implementation mechanism.

 

Key recommendations from the DPME evaluation included the following:

• The Department of Human Settlements (DHS) and National Treasury should confirm the USDG status as a Schedule 4B Grant, but increase municipal accountability.
• The DHS should revise the monitoring framework, inclusive of rationalising outcome, outputs, and indicators, to focus on changes at beneficiary level.
• The DHS must clarify the Grant intent within identified existing programmes, and the specific outcomes associated with these programmes, and related contributions, in a revised policy framework.
• The DHS and National Treasury should amend the USDG policy framework to stipulate the portion that may be used to procure technical and project management expertise.

 

The DHS reported to the Committee that their response to the above was as follows:

• The USDG is a Schedule 4B Grant and remains as such at this point in time, however, it is also part of the broader local government fiscal review and the outcome of this process will have an impact on the Grant.
• With regard to the broader review by National Treasury of local government infrastructure grants, the Department has provided inputs into the local government infrastructure review process through the applicable channels. The review has an impact on the USDG as alignment is required between the USDG and several other grants that form part of a Built Environment Performance Plan (BEPP).

 

The DHS further reported that, during the National Treasury’s review of local government infrastructure grants, the importance of two factors was emphasised for enhancing the structure of conditional grants: Differentiation and grant consolidation. In the context of the USDG, differentiation means that the grant system should be different for urban and rural municipalities. In metros, the grant system should allow for greater flexibility so that cities can combine grant funds with their own revenue to deliver integrated infrastructure programmes that serve mixed-use and mixed-income developments. The cities also have the capacity to manage the increased responsibility that comes with a Schedule 4 allocation. Consolidation means reducing the number of grants that each municipality receives. The USDG funds         infrastructure across multiple sectors (water, sanitation, roads, public facilities) through a single grant, thus it is aligned to this objective.

1. Improving monitoring capacity and revising monitoring framework

The Department reported that it had taken the following steps to improve monitoring capacity internally to enable independent verification of municipal performance reports:

• The departmental structure is being reviewed to increase the monitoring capacity to enable independent verification of metros’ performance reports.
• Practice notes and guidelines specifying mechanics of how the capital funds for operations will be used and the conditions under which it can be applied, have been developed and, upon approval, will be circulated.
• Regionalisation has been proposed to ensure focussed monitoring.
• A USDG panel involving key sector departments is also being activated.

 

The Department further reported the following steps taken, and progress made, with regard to revising the monitoring framework of the USDG in order to standardise outputs, outcomes and performance indicators to enable comparative quality analysis of expenditure:

• The DHS has revised the monitoring framework from focusing solely on the USDG to monitoring the USDG as part of the entire capital budget of the metros. There is a comparison of the USDG percentage expenditure with the overall capital percentage expenditure in the annual USDG performance report.
• Outputs, outcomes and performance indicators have been standardised in the Departmental Monitoring and Evaluation Framework, the USDG Division of Revenue Act Framework and the USDG Performance Matrix to enable comparative quality analysis of the USDG expenditure.

 

 

4. Observations

The Committee made the following observations/findings based on its deliberations and submissions received:

4.1        Allocations to the Grant

The Urban Settlements Development Grant allocations grew from R2.6 billion, or 14 percent of the capital revenue of metros in 2010/11, to R10.8 billion, or 29 percent of the capital revenue of metros of R37.9 billion in 2016/17 financial year.

4.2        Trends in Grant spending  

4.2.1     During the 2011/12 financial year, (which was the first year of the USDG implementation)

metropolitan municipalities achieved expenditure of 90.3 percent on average. This increased to 94.1 percent in 2012/13 and by the end of the 2015/16 financial year, the expenditure was as at an aggregate of 93.2 percent for the five year period.

4.2.2     For the third quarter of the 2016/17 financial year, all the metros were still far below the expected 75 percent mark, at an average of 53.6 percent; with four metros spending below this average (Ekurhuleni at 43.1 percent, eThekwini at 45.4 percent, City of Cape Town at 50.2 percent and Nelson Mandela Bay at 50.6 percent).

4.3        Policy issues and Grant design

4.3.1     There are a variety of different interpretations of the Grant among the three spheres of government. These range from a narrow focus on supporting housing projects (i.e. provinces), to a broad view of intervening in the built environment (metros and National Treasury). The differences in the interpretation of the Grant have resulted in inter-governmental tension. This tension is articulated by metros viewing the Grant’s flexibility as a means to fund a range of activities that support human settlements, while provinces are of the view that the flexibility is a major disadvantage because metros spend the grant on items that do not directly advance the provision of housing through the Human Settlements Development Grant (HSDG).

4.3.2     Metros fund a wide range of projects using the USDG, primarily focusing on bulk infrastructure, while spending relatively little on the purchase of land.

4.3.3     The spatial analyses of USDG-funded projects indicate that the Grant is generally being directed to both the peripheral and poorest areas of the cities, thus meeting poverty alleviation objectives. However, this has led to a situation where existing spatial patterns are being entrenched rather than transformed. There is, therefore, an inherent tension between the desired output of developing well-located land (i.e. the spatial efficiency objective), and the output of providing existing households with access to basic services.

4.3.4     The USDG was designed to support the devolution of built environment responsibilities to cities, and the housing accreditation process is the key mechanism for achieving this. Without devolution, much depends on coordination between the provinces (HSDG funding) and metros (USDG funding). However, this coordination has not taken place as anticipated, which is impeding service delivery.

4.4        Reporting requirements

A report by the Department of Planning, Monitoring and Evaluation showed that financial reporting on the USDG is not problematic, whereas non-financial reporting is a problem. For example, indicators specified in a Performance Matrix are non-standardised and were reported by metros to be onerous and only undertaken for compliance purposes. The national monitoring of performance is done through a range of tasks, however, the transferring national Department of Human Settlements (DHS) lacks internal monitoring capacity. This has resulted in the Department relying on reports from the metros with minimal independent verification undertaken by the Department. The DHS is evidently also experiencing difficulties in monitoring performance of an outcome-focused supplementary grant. This is partly due to the performance indicators not being suitable for a number of reasons, and because they are output and not outcome-focused. In addition, there is a general failure to define and identify the data elements that should inform the performance indicators.

 

5. Recommendations

After considering and deliberating on the performance of the Urban Settlements Development Grant in the first three quarters of the 2016/17 financial year, the Select Committee on Appropriations recommends as follows:

5.1     Both National Treasury and the Department of Human Settlements should strengthen their support to, and monitoring of, the metros that are currently under-spending. The Committee will also target such metros in its quarterly expenditure monitoring, and will conduct oversight visits to well-spending metros to assess the value for the money spent as well as the achievement of the desired outcomes.

5.2     The Department of Human Settlements, in collaboration with provincial departments for Human Settlements, should speed up the process of accreditation or the assigning of human settlement functions to the metros. The Department should report to the Committee, within 30 days after the adoption of this Report by the House, on progress in this matter.

5.3     The Department of Human Settlements, in collaboration with the National Treasury and the Financial and Fiscal Commission, should look into the feasibility of merging or aligning this Grant with other related grants to avoid any duplication. The Department of Human Settlements should lead the process and report to the Committee, within three months after the adoption of this Report by the House.

5.4     The different interpretations of the Urban Settlements Development Grant policy framework should be resolved among the various spheres of government to avoid any further ambiguity. The Department of Planning, Monitoring and Evaluation, in collaboration with the Financial and Fiscal Commission, should facilitate this process and report to the Committee, within three months after the adoption of this Report by the House.

5.5     The Department of Human Settlements should urgently provide guidelines about reporting on non-financial outcomes of the Urban Settlements Development Grant. The Department should report to the Committee within three months after the adoption of this Report by the House.

   

Report to be considered.