ATC211214: Report of the Select Committee on Appropriations on the Proposed Division of Revenue and Conditional Grant Allocations to Provinces and Municipalities as Contained In the 2021 Medium Term Budget Policy Statement, Dated 14 December 2021

NCOP Appropriations

Report of the Select Committee on Appropriations on the Proposed Division of Revenue and Conditional Grant Allocations to Provinces and Municipalities as Contained In the 2021 Medium Term Budget Policy Statement, Dated 14 December 2021 

Having considered the 2021 Medium Term Budget Policy Statement, and in compliance with section 6(10) of the Money Bills and Related Matters Act, No.  9 of 2009 (as amended), the Select Committee on Appropriations reports as follows:

1. Introduction

The Minister of Finance (the Minister) tabled the Medium Term Budget Policy Statement (MTBPS) on 11 November 2021, outlining the budget priorities of government for the medium term estimates. According to section 6(10) of the Money Bills and Related Matters Act No 9 of 2009 (as amended), committees on appropriations must, within 30 days after the tabling of the MTBPS or as soon as reasonably possible thereafter, report on the proposed division of revenue and conditional grant allocations to provincial and local government as contained in the MTBPS. This report must contain the following:

• The spending priorities of national government for the next three years;
• The proposed division of revenue between the different spheres of government and between arms of government within a sphere for the next three years; and
• The proposed substantial adjustments to conditional grants to provinces and local government, if any.

 

Upon tabling of the 2021 MTBPS, the Committee considered the proposed division of revenue and conditional grant allocations to provinces and municipalities contained therein; and will conduct further consultations after the tabling of the 2022 Division of Revenue Bill by the Minister of Finance.

 

2. Revised medium term expenditure priorities

The proposed division of revenue shows that government continues to devote considerable resources to core functions and social priorities, despite slower spending growth in recent years in line with fiscal consolidation. The social wage accounts for nearly 60 percent of consolidated non-interest spending over the medium term expenditure framework (MTEF). Healthcare, education and social protection make up the bulk of this amount. Debt-service costs, estimated at R1 trillion over the same period, exceed all individual consolidated spending items by function, except for learning and culture, indicating the effect of South Africa’s rising debt stock on basic services.

The proposed division of revenue demonstrates that provinces are responsible for basic education and health services, roads, housing, social development, and agriculture. On the other hand, municipalities provide basic services such as water, sanitation, electricity reticulation, roads and community services. Provincial and municipal governments face multiple pressures over the medium term as government reduces spending growth, and poor economic performance affects other revenue and funding sources. Over the 2022 MTEF period, transfers to provinces and municipalities will grow below inflation.

 

3. The proposed division of revenue

Over the next three years, government proposes to allocate 48.4 percent of available non-interest expenditure to national departments, 42 percent to provinces and 9.6 percent to local government. National resources contract by an annual average of 1.8 percent, provincial resources increase by 0.7 percent and local government resources increase by 4.1 percent.

Proposed Division of Revenue	2022 Medium Term Estimates
	2022/23	2023/24	2024/25
	R billion	R billion	R billion
National allocations	764.7	743.0	774.4
Provinces	658.4	647.2	676.1
Equitable share	538.8	525.3	548.9
Conditional grants	119.6	121.9	127.2
Local governments	146.3	148.9	155.5
Equitable share	83.1	83.6	87.3
General fuel levy sharing with metropolitan municipalities	15.3	15.4	16.1
Conditional grants	47.9	49.9	51.9
Provisional allocations not assigned to votes	5.3	29.3	33.1
Unallocated reserves	15.1	28.8	29.3
Non-interest allocations	1 589.8	1 597.1	1 668.3
Debt-service costs	303.1	334.6	365.8
Contingency reserve	5.0	5.0	5.0
Main budget expenditure	1 897.9	1 936.7	2 039.1
Percentage shares
National departments	48.7%	48.3%	48.2%
Provinces	42.0%	42.0%	42.1%
Local government	9.3%	9.7%	9.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 1: Proposed division of revenue framework

 

4. The provincial equitable share

The proposed division of revenue shows that the provincial equitable share (PES), the main revenue source for provinces, is made up of six components, namely education, health, basic, institutional, poverty and economic activity. To ensure fair funding allocations to each province, the PES formula is updated annually to reflect demographic changes and demand for services based on need. Government has indicated that between the 2022/23 and 2024/25 financial years, changes would be phased in to the health component; which accounts for 27 percent of the formula.

Table 2: Proposed provincial equitable share allocations

Province	2022/23 R million	2023/24 R million	2024/25 R million
Eastern Cape	66 197	67 310	70 166
Free State	29 836	29 085	30 383
Gauteng	115 641	112 808	117 936
KwaZulu-Natal	109 809	106 982	111 701
Limpopo	61 375	59 891	62 631
Mpumalanga	44 110	43 105	45 141
Northern cape	14 338	13 953	14 548
North West	38 017	37 089	38 775
Western Cape	56 444	55 085	57 613
Total	538 767	525 304	548 895

 

5. Changes to provincial allocation structure

The proposed division of revenue proposes several changes to the structure of provincial conditional grants over the medium term.  Over the years, a number of components have been introduced into the HIV, TB, Malaria and Community Outreach Grant. From the 2022/23 financial year, the Grant will consist of only a comprehensive HIV/AIDS component, funding HIV/AIDS and tuberculosis related services, a district health component, funding community outreach services and services related to COVID-19, and a human papillomavirus and malaria component. The Grant will be renamed the District Health Programme Grant. The mental health and oncology components introduced in this Grant in the 2021 MTEF will be shifted to the direct National Health Insurance Grant.  

The colleges of agriculture have been shifted to the national government, as will the funding provided through the Comprehensive Agricultural Support Programme Grant. The proposed division of revenue shows that, alongside responsibility for early childhood development, the Early Childhood Development Grant will be moved from the Department of Social Development to the Department of Basic Education from the 2022/23 financial year.

The Provincial Roads Maintenance Grant includes an incentive component allocated based on provincial performance. In the 2021 Budget, this component was allocated using the main formula of the Grant. However, due to delays in developing objective allocation criteria, the incentive component will be removed from the grant baseline for the 2022/23 financial year. The proposed division of revenue suggests that R15 million in 2022/23, R30 million in 2023/24, and R30 million in 2024/25 will be reprioritised from the Grant to the Department of Transport to fund a system that will be used to centralise data collected. The National Treasury committed to continue to work with the Department of Transport to develop objective criteria for the incentive component.

 

6. Changes to the structure of local government allocations

The local government equitable share (LGES) formula has been updated to account for projected household growth, inflation and estimated increases in bulk water and electricity costs over the MTEF period. The 2021 Budget stated that the scope of the Municipal Infrastructure Grant would be expanded to help municipalities improve their asset management practices. This change has been delayed, so funds will not be allocated to a new indirect component of the Grant at the beginning of 2022/23. Funds may be transferred during the year if the Department of Cooperative Governance and Traditional Affairs does the work required to identify municipalities that need this intervention.

 

7. Reviewing the structure of the local government fiscal framework

National Treasury reported that between August 2020 and July 2021, the special lekgotla of the Budget Forum – the intergovernmental structure established to facilitate consultation on local government finances – had met three times to discuss municipal sustainability, the local government fiscal and functional framework, and asset management and infrastructure funding. Flowing from these deliberations, the National Treasury, the Department of Cooperative Governance, the South African Local Government Association (Salga), the Financial and Fiscal Commission (FFC) and provinces were implementing and monitoring joint working plans for a five-year local government reform.   

 

8. Towards building capable local government

National Treasury submitted that many municipalities had insufficient capacity to fulfil their financial responsibilities; which was evident in overreliance on external financial consultants. Municipalities had spent over R1 billion on financial reporting consultants in 2019/20, even though financial reporting was a core responsibility of their internal finance units.

To mitigate this, national government provided a range of support and resources to help municipalities to build capacity. In 2021, the National Treasury reviewed the system of capacity-building for local government. It found that the focus needed to shift from building capacity to a broader measure of developing capability. While capacity is closely linked to individual improvements, for example, developing skills, measures of capability consider a larger context and range of factors, including the environment in which the individual works and the systems and processes used. This has implications for the way the state designs support and the type of resources it provides to local government. Capacity-building programmes often fail because the problem is inadequately diagnosed, and there is a fragmented approach to building capacity. These programmes cannot create an internal culture of accountability and commitment; that is the responsibility of political and administrative leaders in local government.

The proposed division of revenue shows that substantive changes are required to improve municipal capabilities. The review proposed a new framework to build a capable local government by improving the current system incrementally and identifying pilot sites for innovation and experimentation. The 2022 Budget will detail the next steps in this project.

 

1. Observations and Findings

While considering and deliberating on the proposed division of revenue and conditional grant allocations to provinces and municipalities as contained in the 2021 MTBPS, the Select Committee on Appropriations observed the following:

9.1   The Committee notes the proposed allocation of 48.4 percent of the available non-interest expenditure to national departments, 42 percent to provinces and 9.6 percent to local government over the next three years; given that national resources have contracted by an annual average of 1.8 percent. Whilst welcoming the increased allocation to local government, the Committee is concerned that this is still inadequate and further notes that the transfers to provinces and municipalities will grow below inflation over the 2022 medium term expenditure framework (MTEF) period.

9.2    The Committee takes note of the fact that the social wage accounts for nearly 60 percent of consolidated non-interest spending over the medium term; and that healthcare, education and social protection make up the bulk of this amount, while debt-service costs amount to an estimated R1 trillion over the same period and exceed all individual consolidated spending items by function, except for learning and culture.

9.3   The Committee notes the fact that the provincial equitable share (PES) formula is updated annually to ensure fair funding allocations to each province, to reflect demographic changes and demand for services based on the need. It also welcomes the fact that changes will be phased in to the health component between the 2022/23 and 2024/25 financial years; which accounts for 27 percent of the formula.

9.4   The Committee notes that a number of components have been introduced into the HIV, TB, Malaria and Community Outreach Grant over the years and that from the 2022/23 financial year, the Grant will consist of the following:

• A comprehensive HIV/AIDS component.
• An HIV/AIDS funding and tuberculosis-related services component.
• A district health component.
• A component for funding community outreach services and services related to COVID-19.
• A human papillomavirus and malaria component.

9.5   The Committee welcomes the fact that the mental health and oncology components introduced in the HIV, TB, Malaria and Community Outreach Grant in the 2021 MTEF, will be shifted to the direct National Health Insurance Grant.

9.6  The Committee notes that colleges of agriculture will be shifted to the national government, as will the funding provided through the Comprehensive Agricultural Support Programme Grant. Furthermore, the Committee notes that the proposed division of revenue shows that both the early childhood development (ECD) function and the relevant conditional grant will shift from the Department of Social Development to the Department of Basic Education from the 2022/23 financial year.

9.7   The Committee remains concerned that the incentive component of the Provincial Roads Maintenance Grant (PRMG), which is allocated based on provinces’ performance, will be removed from the baseline due to the delays by the Department of Transport to finalise objective allocation criteria. The Committee further notes that the proposed division of revenue suggests that R15 million in 2022/23, R30 million in 2023/24, and R30 million in 2024/25, will be reprioritised from the PRMG to the Department of Transport to fund a system that will be used to centralise data collected.

9.8    The Committee welcomes the fact that the scope of the Municipal Infrastructure Grant (MIG) will be expanded to help municipalities to improve their asset management practices. The Committee is concerned that such changes have been delayed and therefore funds will not be allocated to a new indirect component of the Grant at the beginning of 2022/23, until the Department of Cooperative Governance and Traditional Affairs does the work required to identify municipalities that need the intervention.  

9.9   The Committee remains concerned that many municipalities have insufficient capacity to fulfil their financial responsibilities; which is evident in overreliance on external financial consultants. As such, municipalities have reportedly spent over R1 billion on financial reporting consultants in the 2019/20 financial year, even though financial reporting is a core responsibility of their internal finance units, assisted by municipal finance management units in provincial treasuries.

9.10 The Committee notes that local government capacity-building programmes often fail to achieve good results due to inadequate diagnosis of the problem as well as the fragmented approach to capacity building. Moreover, such programmes cannot create an internal culture of accountability; which is the responsibility of political and administrative leaders in local government.

 

 

 

 

1. Recommendations

After considering and deliberating on the proposed division of revenue and conditional grants allocations to provincial and municipalities as contained in the 2021 MTBPS and submissions by stakeholders, the Select Committee on Appropriations recommends as follows:

10.1  Whilst noting the impact of COVID-19 on the economy, the Committee is of the view that National Treasury and Cabinet should outline and continue to intensify efforts to develop policies, interventions and measures to grow the economy in the 2022 Budget, to avoid a situation where transfers to provinces and municipalities continue to grow below inflation. This will also assist in better managing the escalating cost of government debt, which negatively affects resources to deliver basic services to the poor and vulnerable.   

10.2 Whilst welcoming the annual update of the provincial equitable share (PES) formula to ensure fair funding allocations to each province, the Committee urges National Treasury and the Department of Health to expedite the process of phasing in the changes to the health component between the 2022/23 and 2024/25 financial years; which accounts for 27 percent of the formula. In addition, National Treasury, together with provincial treasuries, should ensure that monitoring systems and controls are put in place to achieve effective and efficient spending of the PES.

10.3  Whilst the introduction of various components into the HIV, TB, Malaria and Community Outreach Grant over the years is welcomed, the National Treasury and the Department of Health should ensure that this conditional grant expenditure is improved and implemented according to the division of revenue framework.

10.4  Whilst the Committee welcomes the shifting of the mental health and oncology components introduced in the HIV, TB, Malaria and Community Outreach Grant in the 2021 MTEF to the direct National Health Insurance Grant for provinces; National Treasury and the Department of Health need to make sure that sound financial management and procurement processes are strengthened for provincial health departments to avoid wastage. National Treasury should report on this matter during the next budget process.

10.5 The Department of Basic Education, together with provincial education departments, should ensure that the lack of parity between provinces regarding the stipend paid to ECD workers is urgently addressed, once the function shift from the Department of Social Development has been completed. COSATU and other federations should work with government to ensure progress on this matter.

10.6 The Committee urges the Department of Transport to fast-track the development of objective allocation criteria for the incentive component of the Provincial Roads Maintenance Grant (PRMG), which has been removed from the baseline due to some delays. Further, the National Treasury and the Department of Transport, together with their provincial counterparts, should make sure that allocations earmarked for the PRMG are utilised effectively, according to the grant framework, to address the poor state of some provincial roads, which negatively affects economic activities. National Treasury should report on this issue during the next budget process.

 

10.7  Whilst the Committee welcomes the expansion of scope for the Municipal Infrastructure Grant (MIG) to help municipalities to improve their asset management practices; the Committee urges the Department of Cooperative Government and Traditional Affairs to fast-track the process of identifying municipalities that require such intervention, for funds to be earmarked in the 2022/23 financial year. National Treasury must report on this during the next budget process.

 

10.8  Whilst the Committee welcomes the increased allocation for local government over the medium term period, the National Treasury and the Department of Cooperative Governance and Traditional Affairs, together with their provincial counterparts and the South African Local Government Association (Salga), need to work together to ensure that suitably qualified and experienced individuals are appointed in finance units at municipalities. The Committee is of the view that building the required in-house capacity is paramount for any stable government and therefore the amount of R1 billion reportedly spent on consultants to compile municipal financial reports is highly unacceptable; especially when municipal finance management units have been established in the provincial treasuries to also assist.    

10.9 The National Treasury, together with Department of Cooperative Governance and Traditional Affairs, should ensure that institutional problems at local government are adequately diagnosed before solutions are developed and the current fragmented capacity-building programmes are reviewed and tailored to respond to specific capacity challenges affecting local government finances. They should also ensure that municipal finance management units are strengthened and accountability is enforced, both politically and administratively, to ensure consequence management for transgressors.

10.10 The Committee notes with concern the growing trend of allocating indirect grants which creates a false narrative of increased allocations to local government when in fact these are merely national department projects being rolled out at local level; and therefore wishes to emphasise the importance of the three spheres of government and the important distinctions between the spheres.  The lack of capacity at certain municipalities to spend should not disadvantage those municipalities that are able to spend their direct conditional grants. In addition, the administering department should ensure that municipalities who are unable to spend, are capacitated to perform better.                       

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.