ATC210526: Report of the Select Committee on Appropriations on the Division Of Revenue Bill [B3-2021], Dated 26 May 2021

NCOP Appropriations

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE DIVISION OF REVENUE BILL [B3-2021], DATED 26 MAY 2021

The Select Committee on Appropriations, having considered the Division of Revenue Bill [B3 – 2021] (National Assembly-Section 76(1)), referred to it and classified by the JTM as a Section 76(1) bill, reports as follows:

 

1. Introduction and background

Section 214(1) of the Constitution of the Republic of South Africa requires that every year a Division of Revenue Act should determine the equitable division of nationally raised revenue between national, provincial and local government. In line with Section 7(1)(3) of the Money Bills and Related Matters Act (Act No 9 of 2009), as amended by Act No 13 of 2018 (the Money Bills Act); Section 27(1) of the Public Finance Management Act (Act No 1 of 1999), as amended by Act 29 of 1999 (the PFMA), and  Section 10(1) of the Intergovernmental Fiscal Relations Act (Act No. 97 of 1997), the Minister of Finance, Mr T Mboweni, tabled the 2021 annual national Budget, including the Division of Revenue Bill (the Bill) in the National Assembly on 24 February 2021.

The purpose of the Bill is to provide for –

1. the share of each sphere of government of the revenue raised nationally for the relevant financial year;
2. each province’s share of the provincial share of that revenue; and any other allocations to the provinces, local government or municipalities from the national government’s share of that revenue, and any conditions on which those allocations are or must be made.

 

1. Legislative framework guiding processing of Bill, consultations and public participation

According to the above-mentioned legislative frameworks, the Bill must be processed following the procedure established by Section 76(1) of the Constitution. On 18 March 2021, the Bill was passed by the National Assembly and referred to the NCOP and the Committee for consideration and report as required by Section 9(2) of the Money Bills Act. Due to the continuing COVID-19 global pandemic, the Committee invited all provincial portfolio committees on Finance and/or Treasury to be part of the meeting wherein the Committee was briefed by National Treasury, on 10 March 2021. The same approach was followed by the Committee on 17 March 2021, when the Committee – in compliance with Section 15 of the Money Bills Act - was briefed by the Parliamentary Budget Office (PBO) and, in compliance with section 214(2) of the Constitution and Section 10(4) of the Intergovernmental Fiscal Relations Act No.97 of 1997, the Committee also consulted the Financial and Fiscal Commission (FFC). Furthermore, during a virtual meeting on 12 May 2021, in compliance with section 214(2) of the Constitution, the Committee consulted with the South African Local Government Association (Salga) on the Bill.

In addition to that, as per Section 72 (1)(2) of the Constitution and 9 (5)(b) of the Money Bills Act, the Committee facilitated public participation while processing the Bill. To this end, advertisements calling for public submissions were publishedin the national and regional print media in all eleven official languages from 09 to 14 April 2021, with 28 April 2021 as the closing date. The Committee also approached certain key stakeholders who had made submissions in the past. Despite these efforts the Committee received only one written submission, from theCongress of South African Trade Unions (COSATU), who also made an oral presentation to the Committee during the meeting of 12 May 2021.

The National Council of Provinces, through the Permanent Delegates – Committee Members - briefed provinces between 03 and 11May 2021.The Committee received and considered the submitted provincial negotiating mandates on 19 May 2021 and final mandates on 26 May 2021, which was an indication that provinces had fully participated in the processing of the Bill, as envisaged in Section 214(2) of the Constitution.

 

1. Overview of 2021 Medium Term Expenditure Framework (MTEF)

The central fiscal objectives over the 2021 Medium Term Expenditure Framework (MTEF) period are to -

• Narrow the budget deficit and stabilise the debt-to-GDP ratio, primarily by controlling non-interest expenditure growth;
• Provide continued support to the economy and public health services in the short term, without adding to long term spending pressures; and
• Improve the composition of spending, by reducing growth in compensation while protecting capital investments.   

 

The 2021 MTEF fiscal objectives are framed by the two government objectives as set out in the 2020 Medium Term Budget Policy Statement (MTBPS), namely, promoting economic recovery and fiscal consolidation. Government’s immediate fiscal path, focusing on supporting high levels of economic growth, largely depends on more easing of the COVID-19 pandemic regulations through a mass vaccination programme fully funded by government. Over the medium term, government’s structural reforms aim to lower barriers to faster, inclusive growth by improving access to reliable electricity, water and sanitation services and enabling cost-effective digital services. Furthermore, government plans to promote the green economy and support industries with high employment potential, such as tourism and agriculture.

 

1. The 2021 Division of Revenue allocations

Table 1 below indicates the overall allocations to national, provincial and local spheres of government for the medium term.

 

Table 1: Equitable division of revenue raised nationally

Spheres of Government	Column A	Column B
	2021/22	Forward Estimates
		2022/23	2023/24
National allocations1,2	R’000 1 232 566 664        523 686 351       77 999 135	R’000 1 263 660 751      524 088 024      83 084 515	R’000 1 302 172 028        525 303 747      83 569 989
Provincial allocations
Local government allocations
Total allocations	1 834 252 150	1  870 833 290	911 045 764

• National share includes conditional allocations to provincial and local spheres, general fuel levy sharing with metropolitan municipalities, debt-service costs, the contingency reserve and provisional allocation
• The direct charges for the provincial equitable share are netted out

Over the 2021 MTEF period, after budgeting for debt service costs, the contingency reserve and provisional allocations, 48.7 percent of nationally raised funds are allocated to national government, 41.9 percent to provinces and 9.4 percent to local government. As proposed reductions to the public service wage bill affect only national and provincial governments, local government’s share of revenue has risen in relative terms. Transfers to provinces grow by an annual average of 1 percent over the medium term, with the equitable share growing by 0.3 percent and conditional grants growing by 4.1 percent. Local government transfers grow by an annual average of 2.3 percent over the medium term, equitable share declines by 0.4 percent and conditional grants grow by an annual average of 7.3 percent over the same period. TheBill is redistributive, as funds allocation is based on the demand for public services in each province and municipality, and not its contribution to national revenues.

4.1 Provincial government equitable share allocation

The provincial equitable share (PES) amounts to R538.5 billion in 2020/21, which is R4.4. billion less than estimated in the 2020 Budget. Fiscal pressures have increased since the 2020 Budget and expenditure cuts had to be revised upwards to alleviate fiscal constraints. Provinces have had to identify several cost-saving measures, including maintaining compensation limits; reducing costs by merging provincial public entities; improved integrated planning to avoid duplication of services; and enhanced project management to ensure the correct pricing of projects.

Table 2: Provincial Equitable Shareand Conditional Grant Allocations

Province	Equitable Share 2021/22 R’million	Conditional Grants 2021/22 R’million	Total transfers for 2021/22 R’million	Equitable Share 2022/23 estimate R’million	Equitable Share 2023/24 estimate R’million	Average growth rate of PES over 2021 MTEF %
Eastern Cape	68 060	13 296	81 356	67 428	66 899	-0,9
Free State	29 055	8 459	37 514	29 008	29 005	-0,1
Gauteng	111 429	24 968	136 397	112 561	113 870	1,1
KwaZulu-Natal	107 126	22 734	129 860	106 928	106 895	-0,1
Limpopo	60 028	10 523	70 551	59 621	59 306	-0,6
Mpumalanga	42 828	8 913	51 741	42 798	42 835	0,0
Northern Cape	13 919	4 685	18 604	13 928	13 959	0,1
North West	36 793	8 222	45 015	36 939	37 144	0,5
Western Cape	54 448	13 530	67 978	54 876	55 390	7.0
Unallocated		451	451			n/a
TOTAL	523 686	115 781	639 467	524 088*	525 304*	0.2
* Total estimated PES allocations for 2022/23 and 2023/24, excluding unallocated amounts

 

Table 2 shows that total transfers to provinces in 2021/22 amount to R639.4 billion, of which R523.7 billion is the equitable share and R115.8 billion is conditional grant funding. Included in the conditional grant funding is an unallocated amount of R451 million, which is R140 million for Provincial Disaster Reliefand R311 million for Provincial Emergency Housing for the 2021/22 financial year. These funds will only be released once an emergency is declared.  The responsiveness of the disaster grants will be enhanced in 2021 by allowing for funding to flow more rapidly following a disaster declaration.

4.2 Provincial conditional grants

Major changes to the provincial conditional grant framework are as follows:

 

4.2.1 New grant:

A new standalone Informal Settlements Upgrading Grant for provinces will be introduced in 2021. The Grant is comprised of components previously within the Human Settlements Development Grant and lessons learnt from the components will inform the implementation of the standalone grant. The Grant funding amounts to R12.3 billion over the 2021 MTEF, of which R3.9 billion is allocated for 2021/22.

 

4.2.2 Additions to grant baselines

(a)  R1.5 billion will be added to the HIV, TB, Malaria and Community Outreach Grant in 2021/22.

(b)  R129 million will be added to the Health Facility Revitalisation Direct Grant over the 2021 MTEF, which will fund the construction of the Tygerberg Regional Hospital and Klipfontein Hospital in the Western Cape. An amount of R14 million has been allocated for the 2021/22 financial year.

 

4.2.3 Scope of grant expanded

(a)  In response to the ongoing COVID-19 pandemic, a new COVID-19 component was created within the HIV, TB, Malaria and Community Outreach Grant in 2020/21. Funds were only allocated in-year for 2020/21, with no additional funding being allocated for the 2021 MTEF.

(b)  Two new components, namely Mental Health Services and Oncology, are created within the HIV, TB, Malaria and Community Outreach Grant, with funds reprioritised from the personal services component of the National Health Insurance Indirect Grant. The Mental Health Services component is allocated R317 million and the Oncology component R336 million over the 2021 MTEF.

 

4.2.4 Reprioritisation and ring-fencing of grant funding

(a)  R204 million has been reprioritised within the National Tertiary Services Grant over the 2021 MTEF, to develop and expand tertiary services in the Eastern Cape, Limpopo, Mpumalanga and the North West. The funds have been ring-fenced in the 2021/22 allocations for these provinces and remain unallocated for 2022/23 and 2023/24.

(b)  R76 million has been reprioritised within the training component of the Statutory Human Resources, Training and Development Grant over the 2021 MTEF to develop and expand tertiary services (specifically the training of specialists, registrars and supervisors) in the Eastern Cape, Limpopo, Mpumalanga and the North West. The funds have been ring-fenced in the 2021/22 allocations for these provinces and remain unallocated for 2022/23 and 2023/24.

(c)  R543 million is ring-fenced within the Human Settlements Development Grant in 2021/22 to upgrade human settlements in mining towns in six provinces.  These allocations respond specifically to areas that have a high proportion of economic activity based on the natural resources sector and are experiencing significant informal settlement challenges.

(d)  R90 million has been reprioritised within the Mass Participation and Sport Development Grant over the 2021 MTEF to support the Netball World Cup, which will be hosted in the Western Cape in 2023. The allocation for the 2021/22 financial year amounts to R30 million.

 

4.2.5 Reductions to grant baselines

(a)  The Comprehensive Agriculture Support Programme (CASP) Grant baseline will be reduced by R205 million over the 2021 MTEF, of which the reduction in 2021/22 is R44 million.

(b)  The Ilima/Letsema Project Grant baseline will be reduced by R78 million over the 2021 MTEF, of which the reduction in 2021/22 is R17 million.

(c)The Land Care Programme: Poverty Relief and Infrastructure Development Grant baseline will be reduced by R11 million over the 2021 MTEF, of which the reduction in 2021/22 is R2 million.

(d) The HIV and AIDS (Life Skills and Education) Grant’s baseline will be reduced by R47 million over the 2021 MTEF, of which the reduction in 2021/22 is R10 million.

(e) The Maths, Science and Technology Grant baseline will be reduced by R47 million over the 2021 MTEF, of which the reduction in 2021/22 is R10 million.

(f) The HIV, TB, Malaria and Community Outreach Grant baseline will be reduced by R1.7 billion over the 2021 MTEF, of which the reduction in 2021/22 is R1.3 billion.

(g)The Health Facility Revitalisation Grant baseline will be reduced by R469 million over the 2021 MTEF, of which the reduction in 2021/22 is R154 million.

(h) The Statutory Human Resources, Training and Development Grant baseline will be reduced by R400 million over the 2021 MTEF, of which the reduction in 2021/22 is R72 million.

(i)  The National Health Insurance (NHI) Direct Grant baseline will be reduced by R55 million over the 2021 MTEF, of which the reduction in 2021/22 is R12 million.

(j)The NHI Indirect Grant baseline will be reduced by R90 million in 2021/22 due to technical changes.

(k)  The National Tertiary Services Grant baseline will be reduced by R2.1 billion over the 2021 MTEF, of which the reduction in 2021/22 is R382 million.

(l) The Expanded Public Works Programme (EPWP) Integrated Grant for Provinces baseline will be reduced by R81 million over the 2021 MTEF, of which the reduction in 2021/22 is R17 million.

(m) The Social Sector EPWP Incentive Grant for Provinces’baseline will be reduced by R79 million over the 2021 MTEF, of which the reduction in 2021/22 is R17 million.

(n) The Community Library Services Grant’s baseline will be reduced by R239 million over the 2021 MTEF, of which the reduction in 2021/22 is R51 million.

(o) The Mass Participation and Sport Development Grant baseline will be reduced by R115 million over the 2021 MTEF, of which the reduction in 2021/22 is R25 million.

(p) The Provincial Disaster Relief Grant baseline will be reduced by R28 million over the 2021 MTEF, of which the reduction in 2021/22 is R6 million.

(q) The School Infrastructure BacklogsIndirectGrant baseline will be reduced by R336 million over the 2021 MTEF, of which the reduction in 2021/22 is R12 million.

 

1. Local government equitable share allocation

Over the 2021 MTEF period, the local government equitable share (LGES), including the Regional Service Council/Joint Service Board (RSC/JSB) Levies Replacement Grant and the Special Support for Councillor Remuneration and Ward Committees Grant, amounts to R244.7 billion (R78 billion in the 2021/22, R83.1 billion in the 2022/23 and R83.6 billion in the 2023/24 financial years, respectively). Due to fiscal consolidation measures announced in the 2020 MTBPS, the LGES allocation declines by R14.7 billion (or an average annual rate of 0.4 percent) over the MTEF period.

 

4.4 Local government conditional grants

Funds raised by national government are transferred to municipalities through conditional and unconditional grants. Over the 2021 MTEF period, R432.6 billion (direct conditional grant funds) will be directly transferred to local government, and a further R23.7 billion is allocated through indirect grants. National transfers accounts for a relatively small portion of the local government fiscal framework, with the majority of local government revenues being raised by municipalities themselves through their substantial revenue-raising powers. However, due to the variations in municipalities, poor rural municipalities rely on transfers for most of their revenue, while urban municipalities raise the majority of their own revenue. Major changes to the local government conditional grant framework are as follows:

 

4.4.1 New grant

A new standalone Informal Settlements Upgrading Partnership Grant for Municipalities will be introduced in 2021. The Grant is comprised of the informal settlements upgrading partnership component previously within the Urban Settlements Development Grant. Lessons learnt from the component will inform the implementation of the standalone grant. The Grant funding amounts to R12.5 billion over the 2021 MTEF, of which R3.9 billion is allocated for 2021/22.

 

4.4.2 Renaming of grant

The Integrated City Development Grant was repurposed in 2020 to support metropolitan municipalities in developing a pipeline of investment-ready capital programmes and projects. The Grant aims to assist cities to build internal capacity or obtain technical support to prepare and package key infrastructure projects, hence the Grant is renamed the Programme and Project Preparation Support Grant in 2021/22. The Grant is allocated R1.1 billion over the 2021 MTEF, of which R341.3 million is allocated for the 2021/22 financial year.

 

4.4.3 Addition to grant funds

R3.4 billion is added to the City of Cape Town’s Public Transport Network Grant allocation over the medium term. This amount is in addition to the grant formula and performance incentive, as approved by the Budget Facility for Infrastructure. The funds are in support of the City’s MyCiti public transport network expansion.

 

4.4.4 Reprioritisation of grant funding

(a) R15 million has been reprioritised from the Municipal Infrastructure Grant (MIG) and shifted to the Integrated Urban Development Grant in 20201/22 to fund sport infrastructure in the Polokwane Local Municipality.

(b) An additional R329 million was reprioritised within the MIGin 2021/22 to fund a once-off councillor gratuity for non-returning councillors.

(c) R21 million was also reprioritised within the Integrated Urban Development Grant in 2021/22 to fund a once-off gratuity for non-returning councillors.

 

4.4.5 Grant funding earmarked

(a)R759 million of the MIGfunding is earmarked outside of the grant formula for specific sport infrastructure projects identified by the national Department of Sport, Arts and Culture. The amount earmarked for the 2020/21 financial year is R253 million.

(b)  Approximately a third of the Municipal Systems Improvement Grant’s baseline allocation of R135 million will be used to support the institutionalisation of the district-development model (DDM) adopted by Cabinet in August 2019. The model promotes the operation of governments in unison, focusing on the municipal, district and metropolitan spaces as the impact areas of joint planning, budgeting and implementation. The Grant will fund the following in 2021:

• Comprehensive institutional diagnostic assessments of the 21 district areas where the district municipality is a Water Service Authority. The purpose of the diagnostic assessments is to determine the skills, systems, performance, institutional gaps and the main constraints impeding effective and sound municipal performance; and the
• Development of institutional improvement plans that will inform all future capacity development programmes and municipal support initiatives to enhance the continued roll-out of the model.

 

4.4.6 Scope of grant expanded

In 2021, the scope of the MIGwill be expanded to allow municipalities to use up to 5 percent of their allocation to develop Infrastructure Asset Management Plans, which is aimed at addressing the poor asset management in municipalities. To make use of this provision, municipalities will need to submit a business plan to the Department of Cooperative Governance, accompanied by a copy of its audited asset register.

 

4.4.7 Reductions to grant baselines

 

(a)  The MIG baseline will be reduced by a total of R344 millionin 2021/22, following the reprioritisation of R15 million for sport infrastructure for the Polokwane Municipality and R329 million to fund a once-off councillor gratuity for non-returning councillors.

(b)  The Integrated Urban Development Grant baseline will be reduced by a net of R6 million in 2021/22, following the addition of R15 million for sport infrastructure for the Polokwane Municipality and R21 million that was reprioritised from the Grant to fund a once-off councillor gratuity for non-returning councillors.

(c)  The Public Transport Network Grant baseline will be reduced by R1.3 billion over the 2021 MTEF because only six of the 13 cities receiving the Grant have successfully launched public transport systems. The Grant reduction in 2021/22 is R282 million.

(d) The Rural Roads Asset Management Systems Grant baseline will be reduced by R21 million over the 2021 MTEF, of which the reduction in 2021/22 is R5 million.

(e)  The Energy Efficiency and Demand-side Management Grant baseline will be reduced by R43 million over the 2021 MTEF, of which the reduction in 2021/22 is R9 million.

(f)  The Local Government Financial Management Grant baseline will be reduced by R106 million over the 2021 MTEF, of which the reduction in 2021/22 is R23 million.

(g)  The EPWP Integrated Grant for Municipalities baseline will be reduced by R146 million over the 2021 MTEF, of which the reduction in 2021/22 is R31 million.

(h)  The Infrastructure Skills Development Grant baseline will be reduced by R30 million over the 2021 MTEF, of which the reduction in 2021/22 is R6 million.

(i)  The Municipal Disaster Relief Grant baseline will be reduced by R70 million over the 2021 MTEF, of which the reduction in 2021/22 is R15 million.

(j)  The Integrated National Electrification Indirect (Eskom) Grant baseline will be reduced by R250 million over the 2021 MTEF, of which the reduction in 2021/22 is R170 million.

(k)The Neighbourhood Development Partnership Indirect Grant baseline will be reduced by R19 million over the 2021 MTEF, of which the reduction in 2021/22 is R4 million.

 

5. Submissions by stakeholders

As indicated under section 2 above, dealing with public participation, only one public submission on the Bill was received despite the Committee’s efforts to facilitate public participation. The Committee was concerned about this lack of interest and resolved to discuss ways to encourage public participation in budget processes at a future meeting.

 

1. Financial and Fiscal Commission (FFC)

The Financial and Fiscal Commission (FFC) welcomed the R10 billion allocation to deal with provincial COVID-19 interventions. This was supplemented by R6.5 billion to the national Department of Health over two years for vaccination procurement and an estimated R9 billion which could be drawn from the contingency reserve and emergency allocations. However, the FFC called for better alignment of responsibilities between the spheres of government to ensure well-synchronised implementation of programmes. The FFC expressed concern that the vaccination allocation may be incompatible with government’s goal of achieving herd immunity within a 12-month period.

 

With regard to provincial allocations, the FFC submitted that, over the 2021 MTEF period, the Budget made provision for a total of R1.5 trillion and R356 billion in provincial equitable share (PES) and provincial conditional grant allocations, respectively. The FFC noted with concern the fluctuations of annual MTEF forward-estimates which created uncertainty and undermined the integrity of the MTEF; submitting that initial over-optimistic estimates not only sent wrong spending signals but also destabilised provincial budgets during implementation. The FFC also submitted that there were overwhelming concerns that the PES formula was not responsive to the unique needs of the various provinces. It further submitted that the PES must be guarded as the default funding mechanism for provincial expenditure responsibilities and suggested that Parliament and provincial legislatures should receive regular reports on the impact of budget cuts on service delivery to beneficiaries, especially the vulnerable. In terms of conditional grants to provinces, the FFC submitted that constant reprioritisation had a negative impact on service delivery. 

 

With regard to local government, the FFC stated that the COVID-19 pandemic had threatened the viability of many municipalities and compounded their financial, fiscal, governance and service delivery challenges. The FFC cautioned that it should be noted that the pandemic was creating negative legacies for the local government sector, including the following:

 

• Wider deficits for municipalities due to the rapid expansion of COVID-19 related expenditures in the face of widespread revenue under-collection;
• Amplification of challenges of citizen’s access to basic services including housing, water, and sanitation;
• Higher debt levels as revenue collection falls far below the norm; and
• Amplification of inequalities as many communities cannot access required technology to deal with the new norm brought about by COVID-19.

 

The FFC also submitted that the share of local government allocations rises over the MTEF, from 9 percent in 2021/22 to 9.7 percent in 2023/24. However, the said growth was not due to more resources being transferred to the sector, but was relative to reductions to the publicservice wage bill.  The FFC further cautioned that the decline in the real average growth rate of the local government equitable share (LGES) allocation may adversely affect the delivery of basic services to the poor and vulnerable. The FFC therefore implored municipalities to strengthen their revenue collection systems and plug revenue leakages, through harnessing new smart technologies.

 

Mindful of the COVID-19 circumstances, and the quickened fiscal deterioration, the FFC noted the financial and performance dysfunctionality, including fiscal leakages, wastage and inefficiencies; and suggested that the following was required to address these challenges:

 

• A decisive and coherent strategy and the political will to implement it;
• Implementation of fiscal consolidation, targetingareas of under-spending and questionable performance for reductions;
• Eradication of duplication of functions;
• Investment in the use of technology and other areas of improving the capability of public sector personnel;
• Eradication of contract mismanagement and procurement irregularities;
• Zero-based budgeting, based on expenditure reviews and mindful of the importance of pricing and costing of public services; and
• More effective consequence management and accountability mechanisms.

 

5.2     Parliamentary Budget Office (PBO)

The Parliamentary Budget Office (PBO) submitted that the COVID-19 pandemic had worsened already high levels of poverty in South Africa. Furthermore, there was slow progress in dealing with large service delivery backlogs and poor provision of services even before the advent of COVID-19. The PBO submitted that whilst there had been improvement in provincial and local government social and economic development indicators, the COVID-19 pandemic had erased some of the service delivery gains achieved, putting more pressure on service delivery at both provincial and local government.

 

The PBO expressed concern that government intended, over the MTEF, to consistently decrease coverage of the basic services component of the LGES which provided for free basic services to indigent households. The PBO also highlighted certain initiatives in progress, such as the review of the PES formula, which included the following:

 

• Developing options to take account of costs associated with living in a rural location;
• Revising and updating the risk-adjusted factor of the health component; and
• Developing options to account for different funding needs of different types of schools and learners.

 

The PBO further submitted that many stakeholders had expressed concern that current elements of the local government fiscal framework made it difficult for municipalities to balance their revenues with their expenditure responsibilities. A proposal was on the table to review the structure of the local government framework and to agree which issues must be addressed. The PBO also emphasised the need for adequate skills and capacity in government and municipalities to implement budgets; and that governance measures should function according to legislation.

 

1. South African Local Government Association (Salga)

The South African Local Government Association (Salga) acknowledged the gloomy picture of the economic outlook and related fiscal challenges, exacerbated by the unforeseen and continuing demands on the fiscus as a result of the COVID-19 pandemic; and undertook to work with national government on resolving the challenges faced by local government.

 

Salga expressed concern over the proposed decrease in the LGES from the previous financial year and the 0.4 percentreduction over the MTEF. Salga was of the view that this reduction did not serve the communities well in view of the prevailing economic climate, increased unemployment figures and the negative impact of COVID-19 on municipal revenue collections.

 

Salga further stated that own revenue by municipalities had declined during the COVID-19 lockdown and that the extra R20 billion for COVID-19 relief did not match revenues collected in the previous year. Furthermore, municipal expenditure on goods and services, especially water,had increased due to extra demands from municipalities to cater for COVID-19 related preventative measures like sanitizing public facilities.

With regard to infrastructure grants, Salga submitted that the marginal increase of 7.3 percent in conditional grant allocations would not ease the pressure on local government to address the growing infrastructure backlogs caused by the migration to cities. Furthermore, poorly capacitated municipalities underperformed in capital expenditure, resulting in conditional grants being taken away, as in the case of the Public Transport Network Grant. Therefore, Salga suggested that capacity building measures should be undertaken to improve capital expenditure performance in municipalities. In order to deal with capacity building, Salga recommended that the Bill should provide for the following:

• The creation of effective capacity to support municipalities to root out and prevent corruption, particularly in this period of the pandemic.
• A mechanism to support municipalities to build technical, managerial and leadership capacity in the new normal.
• Salga must be involved in the study of consolidating capacity-building initiatives undertaken by National Treasury.
• The Municipal Systems Improvement Grant must be disaggregated to show the cost of regulatory compliance, for example to the Municipal Standard Chart of Accounts, which is costly to municipalities.
• The grant to implement the district-development model (DDM) study must be monitored in the 21 identified districts to inform future allocations to the next batch of districts or intermediary cities to form part of the DDM.

 

1. Congress of South African Trade Unions (COSATU)

COSATU raised key concerns with regard to the proposed cuts to provincial and local government transfers; wage bill cuts; a lack of plans to address key expenditure priority areas; and the impact COVID-19 on the Health budget.

 

While acknowledging the need for budget shifts to respond to the COVID-19 pandemic effectively, COSATU expressed concern about the impact of some of the proposed cuts over the current financial year as well as over the medium term. In addition to the provincial funding cuts of R205 billion over the medium term on the back of a wage freeze and social grants cuts, COSATU was particularly concerned about reductions in the Human Resources and Training Grant, the disaster management reserves and the Public Transport Network Grant. Moreover, COSATU noted that there were no projected increases to key service delivery departments over the MTEF such as Agriculture and Land Reform, Basic Education and Local Government.

At local government level, COSATU’s key concern was the proposed reduction of R19 billion in municipal grants, and how this would impact the ability of municipalities to invest in infrastructure and transport. Also of concern, was the proposed R2 billion reduction in water infrastructure allocations, particularly to the Eastern Cape. COSATU was of the opinion that these proposed cuts would weaken an already dysfunctional arm of the State.

The proposed reduction of the public service wage bill was a major concern at the heart of the Bill, and COSATU noted that two-thirds of the cuts were planned at the expense of the right of public servants to be protected from inflation. When considering inflationary effects, the proposed 4-year wage freeze would result in a wage reduction for heavily indebted and struggling public servants. COSATU was of the opinion that the freezing of the wage bill undermined and collapsed the constitutionally enshrined right to collective bargaining.

COSATU further noted that the Bill was silent on the following key areas of budget allocation, implementation and management:

• An assessment of the potential negative impact of the proposed cuts and deferred implementation; ensuring that it would not result in a snow-ball effect of worsening infrastructure and service delivery deficits.
• The near collapse of the Amathole District Municipality that had threatened not to pay workers for five months.
• By when Government planned to eradicate mud schools as well as sanitation and infrastructure backlogs. The Department of Basic Education had repeatedly postponed these matters for more than 15 years.
• The commitment by the Finance Minister to deal with the almost R40 billion owed to Eskom by municipalities and provinces, which threatened to collapse Eskom.
• The reasons for under-spending in various municipalities and provinces and action being undertaken to address the negative impact thereof.
• Interventions to address the failure to pay suppliers within 30 days.
• The Section 100 intervention in the North West Provincial Government.

With respect to the COVID-19 pandemic, COSATU was of the opinion that further reinforcements of health care infrastructure, including the filling of vacancies, needed to happen before the expected third wave of infections in June 2021. Planning for the implementation of the National Health Insurance needed to be accelerated, and this required increased healthcare expenditure, and not reductions.

 

6. Provincial mandates

The Committee met on 19 and 26 May 2021, respectively, to consider negotiating and final mandates from provinces.

6.1.       Negotiating mandates

6.1.1. Eastern Cape abstained from offering a view on the Bill.

6.1.2. Free State supported the Bill and raised concerns.

6.1.3. Gauteng supported the Bill and made recommendations.

6.1.4. KwaZulu-Natal supported the Bill.

6.1.5. Limpopo supported the Bill and made recommendations.

6.1.6. Mpumalanga supported the Bill and made recommendations.

6.1.7. Northern Cape supported the Bill and made recommendations.

6.1.8. North West supported the Bill and proposed amendments.

6.1.9. Western Cape did not support the Bill.

 

6.2.       Final mandates

6.2.1. Eastern Cape’s final mandate was not received in time to be considered by the   Committee.

6.2.2. Free State supported the Bill.

6.2.3. Gauteng supported the Bill.

6.2.4. KwaZulu-Natal supported the Bill.

6.2.5. Limpopo’s final mandate was not received in time to be considered by the Committee.

6.2.6. Mpumalanga supported the Bill.

6.2.7. Northern Cape supported the Bill.

6.2.8. North West supported the Bill.

6.2.9. Western Cape did not support the Bill.

 

 7. Observations and findings

1. Despite the declining revenue collectionsand the tough economic situation as a result of the COVID-19 pandemic, the Committee welcomes the efforts demonstrated by government to put together a total budget of R1.8 trillion as reflected in Table 1, of which R639.4 billion is transferred to provinces - R523.7 billion as an equitable share and R115.8 billion in conditional grants. Included in the conditional grant funding is an unallocated amount of R451 million, which is R140 million for Provincial Disaster Relief and R311 million for Provincial Emergency Housing for the 2021/22 financial year.

 

1. The Committee notes government’s three central fiscal objectives, introducing a paradigm shift of expenditure over the 2021 Medium Term Expenditure Framework (MTEF); which are to narrow the budget deficit and stabilise the debt-to-GDP ratio, primarily by controlling non-interest expenditure growth; to provide continued support to the economy and public health services in the short term, without adding to long term spending pressures; and to improve the composition of spending, by reducing growth in compensation of employees whileprotecting capital investments.

 

1. The Committee welcomes the introduction of a new standalone Informal Settlements Upgrading Grant for provinces, which is comprised of components previously within the Human Settlements Development Grant. The Grant funding amounts to R12.3 billion over the 2021 MTEF, of which R3.9 billion is allocated for 2021/22.

 

7.4 The Committee welcomes the additional R1.5 billion for the HIV, TB, Malaria and Community Outreach Grant in 2021/22 and the additional R129 million for the direct component of the Health Facility Revitalisation Grant over the 2021 MTEF, which will fund the construction of the Tygerberg Regional Hospital and Klipfontein Hospital in the Western Cape.

 

7.5Whilst the Committee welcomes the new components created within the HIV, TB, Malaria and Community Outreach Grant, namelyfor COVID-19; Mental Health Services (with a R317 million allocation for the MTEF); and Oncology (being allocated R336 million for the MTEF); the Committee is concerned that no additional allocation is being made for the COVID-19 component over the MTEF, given the much anticipated impact of the third wave of the pandemic; expected to hit the country during winter time.

 

7.6 The Committee notes the reprioritisation within the following conditional grants over the 2021/22 MTEF period: The National Tertiary Services Grantmeant to develop and expand tertiary services; the Statutory Human Resources, Training and Development Grantfor the Eastern Cape, Limpopo, Mpumalanga and the North West; theHuman Settlements Development Grantmeant to upgrade human settlements in mining towns in six provinces; and the Mass Participation and Sport Development Grant, meant to support the Netball World Cup, which will be hosted in the Western Cape in 2023. The Committee supports the ring-fencing ofthese funds to ensure that grant funds are not spent for other purposes than they were intended for.

 

7.7    The Committee understands and appreciates the magnitude of economic challenges and interventions taken by government to address the situation. However, the Committee has always expressed concern about the service delivery impact of a blanket approach whencutting expenditure, and madea recommendation during the 2020 Medium Term Budget Policy Statement (MTBPS) process that National Treasury,together with sector departments, should conduct an impact assessment for these budget cuts; particularly with regard to the following conditional grants:The Comprehensive Agriculture Support Programme (CASP) Grant; the Ilima/Letsema Project Grant; theLand Care Programme: Poverty Relief and Infrastructure Development Grant; the Maths, Science and Technology Grant; theHIV, TB, Malaria and Community Outreach Grant; the Health Facility Revitalisation Grant;the National Health Insurance (NHI) Direct Grant and Indirect Grant component; theExpanded Public Works Programme (EPWP) Integrated Grant for Provinces; the Social Sector EPWP Incentive Grant; the Provincial Disaster Relief Grant; and theSchool Infrastructure Backlogs IndirectGrant.

 

7.8 The Committee welcomes both the direct and indirect transfers to municipalities over the 2021 MTEF period, of which R432.6 billion will be directly transferred to local government, and a further R23.7 billion is allocated through indirect grants. However, the Committee is once again concerned about the service delivery impact of the R14.7 billion reductionin local government allocations(an average annual rate of 0.4 percent) over the 2021/22 MTEF period; which isdue to fiscal consolidation measures announced in the 2020 (MTBPS).

 

7.9The Committee notes and welcomes the fact that approximately a third of the Municipal Systems Improvement Grant’s baseline allocation of R135 million will be used to support the institutionalisation of the district-development model (DDM) adopted by Cabinet in August 2019. The Grant will fund the comprehensive institutional diagnostic assessments of the 21 district areas where the district municipality is a Water Service Authority (WSA) and the development of institutional improvement plans that will inform all future capacity development programmes and municipal support initiatives to enhance the roll-out of the model.

 

7.10 The Committee welcomes the expansion of scope of the Municipal Infrastructure Grant (MIG)to allow municipalities to use up to 5 percent of their allocation to develop Infrastructure Asset Management Plans, which is aimed at addressing the persistent phenomenon of poor infrastructure asset management in some municipalities.

 

7.11 The Committee noted the Financial and Fiscal Commission’s (FFC’s) assessment that there are overwhelming concerns that the provincial equitable share (PES) formula is not responsive to the unique needs of the various provinces and that the PES must be guarded as the default funding mechanism for provincial expenditure responsibilities; as well as the suggestion that Parliament and provincial legislatures should receive regular reports on the impact of budget cuts on service delivery to beneficiaries, especially the vulnerable and the poor.

 

7.12The Committee remains concerned over the decline in collection of billed revenues in local governmentreported by Salga - from 93 percent in 2019 to 20 percent in 2020 in four metros; as the Committee is of the view thatrate collection levels are generally better at metros than at other municipalities.

 

7.13The Committee welcomes the involvement of Salga in preparation and planning for the Local Government Budget Lekgotla and the improved working relationship between Salga and National Treasury. The Committee further welcomes the increase in the allocations that favour rural municipalities and rural communities in the 2021 Budget, and its possible impact on local economic development and more infrastructure investment in rural areas.

 

7.14 The Committee noted the assessment by COSATU that provincial and local government’s rising Eskom debt, which threatens the survival of the state-owned entity (SOE), might lead to above inflation increases in the electricity tariffs and the Committeeagreed with COSATU that all electricity debts which occurred prior 1994 should be written off.

 

7.15 The Committee noted the submission made by COSATU suggesting that National Treasury should pre-slice funds from municipal transfers to pay Eskom and that the whole country should use locally manufactured prepaid meters; and shared COSATU’s concern that many municipalities have either reduced, or stopped providing, free basic services to registered indigent households.

 

7.16 The Committee remains concerned that not much progress has been made in resolving the wage negotiation issue between government and public sector unions to reach common ground around wage increases.

 

8. Recommendations

8.1Whilst welcoming allocations earmarked for the vaccination procurement process,given the much anticipated third wave of the COVID-19 pandemic, the Committee calls for better alignment of responsibilities between the spheres of government to ensure the well-synchronised implementation of this and other programmes, as well as better planning, coordinationand improved monitoring and oversight among the spheres of government.

 

8.2The Committee requests the Parliamentary Budget Office (PBO) to conduct research on the declining revenue collection by municipalities; how COVID-19has affected municipal revenues; and how the issue is goingto affect the implementation of thedistrict-development model moving forward. This report should be tabled before the Committee in the next budget cycle to inform future Committee recommendations.

 

8.3Whilst the Committee welcomes the introduction of the new health grant components, namely the COVID-19 component; Mental Health Services (with a R317 million allocation for the 2021 MTEF); and Oncology(witha R336 million allocation for the 2021 MTEF); the Committee recommends that National Treasury and provincial treasuries ensure that proper internal control and financial management systems are put in place for provincial health departments to use the new grant components according to the Division of Revenue Framework,in order to achieve spending efficiency and value for money. The misalignment between expenditure and performance targets shouldalso be addressed during the planning phase, withoversight committees both in Parliament and in provincial legislatures, scrutinising and adopting credible departmental plans that are aligned to budget allocations and ensuringthat performance is monitoredquarterly and corrective actions are taken.

 

8.4National Treasury, together with the affected sector departments, should quantify the impact of the reduction inallocations to the following conditional grants: Comprehensive Agriculture Support Programme (CASP) Grant; Ilima/Letsema Project Grant;Land Care Programme: Poverty Relief and Infrastructure Development Grant;Maths, Science and Technology Grant;HIV, TB, Malaria and Community Outreach Grant; Health Facility Revitalisation Grant; National Health Insurance (NHI) Direct Grant and Indirect Grant component;Expanded Public Works Programme (EPWP) Integrated Grant for Provinces; Social Sector EPWP Incentive Grant;Provincial Disaster Relief Grant; and the School Infrastructure Backlogs IndirectGrant. A report on this should be submitted to the NCOP within 60 days after the adoption of this Report by the House. The report should also address how any negative impact will be mitigated so that service delivery is not severely affected.

 

8.5Whilst the Committee welcomes the introduction of the standalone Informal Settlements    Upgrading Grant for provinces, the Committee recommends that the National Treasury, together with the Department of Human Settlements and Water Affairs, ensure that proper internal control systems are put in place to achieve expenditure efficiency, value for money and full compliance with the Division of Revenue Framework. This will ensure effective spending of thegrant allocation of R3.9 billion earmarked for 2021/22 and the R12.3 billion earmarked for the 2021 MTEF.

 

8.6Whilst the Committee welcomes the additional R1.5 billion for the HIV, TB, Malaria and Community Outreach Grant in 2021/22 and the additional R129 million for the direct component of the Health Facility Revitalisation Grant over the 2021 MTEF, the Committee recommends that National Treasury, the Western Cape Provincial Treasury and the national and provincial health departments,makesure that proper internal controls and financial management systems are in place to ensure that funds are spent according to the grant framework and that value for money is achieved with regard to the expenditure on the construction of Tygerberg Regional Hospital and Klipfontein Hospital in the Western Cape.

 

8.7Whilst the Committee welcomes and appreciates the involvement of Salga in planning and preparing for the Local Government Budget Lekgotla and the improved working relations between Salga and National Treasury; the Committee is of the view that this improved working relationship should translate into a positiveimpact of submissions made by Salga on the Division of Revenue, and responses aimed to address the challenges facing local government financing, such as the issue of local government funding not matching the functions of local government as articulated in the Constitution, that Salga has been raising continually. National Treasury andprovincial treasuries,together with the Department of Cooperative Governance and Salga, should look into this matter and report to the NCOP within 60 days after the adoption of this Report by the House.

 

8.8Salga, together with the Department of Cooperative Governance, National Treasury and provincial treasuries,need to ensure that governance and accountability structures, financial management systems and internal controls, including well capacitated internal auditors and independent audit committees, are functional and further ensure that the work of the Municipal Public Accounts Committees (MPACs) is strengthened and the mandate of such committees is legislated. This will ensure that both direct transfers(amounting to R432.6 billion) and indirect transfers (amounting to R23.7 billion) of nationally raised government funds transferred to local government are effectively spent and value for money is achieved in local government.

 

8.9Whilst the Committee welcomes the expansion of scope of the Municipal Infrastructure Grant (MIG) to allow municipalities to use up to 5 percent of their allocation to develop Infrastructure Asset Management Plans, the Committee urges National Treasury and provincial treasuries, together with the departments of cooperative governance and Salga, to ensure that more effective monitoring and oversight be tailored to the MIG projects and other infrastructure projects; particularly in rural municipalitiesand towns where capacity remains an issue. The Committee further proposes that some members of traditional councils could be trained and capacitated in order assist municipalities to deal with service delivery issues and achieve much needed basic service delivery, employment creation, local economic growth, and the eradication of poverty and inequality; especially in rural municipalities.

 

8.10During public hearings and consultationson the Bill, Salga submitted that, in order to address the growing infrastructure backlogs in local government caused by the migration to cities, capacity building mechanisms were needed; as poorly capacitated municipalities underperform in capital expenditure, resulting in conditional grants being taken away, as in the case of the Public Transport Network Grant. Therefore, Salga recommended that the following steps be taken:

• The creation of effective capacity to support municipalities to root out and prevent corruption, particularly in this period of the pandemic;
• A mechanism to support municipalities to build technical, managerial and leadership capacity in the new normal;
• Salga must be involved in the study of consolidating capacity-building initiatives undertaken by National Treasury;
• The Municipal Systems Improvement Grant must be disaggregated to show the cost of regulatory compliance, for example to the Municipal Standard Chart of Accounts, which is costly to municipalities; and
• The grant to implement the district-development model (DDM) study must be monitored in the 21 identified districts to inform future allocations to the next batch of districts or intermediary cities to form part of the DDM.

 

The Committee urges National Treasury,together with the Department of Cooperative Governance,to consider the above specific stepsoutlined by Salga and to provide a response within 60 days after the adoption of this Report by the NCOP.

 

8.11During the public hearings held on the Bill, COSATU submitted that the Bill was silent on the following key areas of budget allocation, implementation and management:

• An assessment of the potential negative impact of the proposed cuts and deferred implementation; ensuring that it would not result in a snow-ball effect of worsening infrastructure and service delivery deficits;
• The near collapse of the Amathole District Municipality that had threatened not to pay workers for five months;
• By when Government planned to eradicate mud schools as well as sanitation and infrastructure backlogs. The Department of Basic Education had repeatedly postponed these matters for more than 15 years;
• The commitment by the Finance Minister to deal with the almost R40 billion owed to Eskom by municipalities and provinces, which threatened to collapse Eskom;
• The reasons for under-spending in various municipalities and provinces and action being undertaken to address the negative impact thereof;
• Interventions to address the failure to pay suppliers within 30 days; and
• The Section 100 intervention in the North West Provincial Government.

The Committee requests National Treasury to consider, and provide a response to, the issues raised by COSATU in the above section within 60 days after the adoption of this Report by the NCOP.

 

8.12Whilst the Committee remains concerned about the lack of progress in resolving the wage negotiations between government and public sector unions to reach common ground around wage increases, the Committee urges both parties involved in the process to respect the rules of engagement within the Bargaining Council and make every effort to find an amicable solution without service delivery to the poor and vulnerable being interrupted.

 

9. Committee decision

The Select Committee on Appropriations, having considered the Division of Revenue Bill [B3 – 2021] (National Assembly-Section 76(1)) referred to it and classified by the Joint Tagging Mechanism as a section 76 Bill, reports that it has agreed to the Bill without any proposed amendments.

The Democratic Alliance (DA), the Economic Freedom Fighters (EFF) and the Freedom Front Plus (FF+) reserved their positions on this Report.

Report to be considered.