2023 Division of Revenue Bill; 2nd Adjustments Appropriation Bill: FFC submission

Standing Committee on Appropriations

07 March 2023
Chairperson: Mr S Buthelezi (ANC)
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Meeting Summary


The Financial and Fiscal Commission (FFC) submission spoke to its recommendations on:
• The Second Adjustments Appropriation Bill for 2022/23 financial year
• 2023 Division of Revenue Bill – Provinces
• 2023 Division of Revenue Bill – Local Government
• Public-Sector Institutions and Investment

On the Second Adjustments Appropriation Bill, the FFC viewed bailouts as fiscally unsound. It said that in the spirit of greater transparency and accountability, future Bills must be accompanied by more information/explanation of the rationale for the proposed adjustments.

On the 2023 Division of Revenue Bill (DORB) the FFC supported the funding for emergency housing due to flooding. It reiterated its previous recommendation that provinces and municipalities should develop adaptation and mitigation strategies to address natural disasters in the long term. The FFC stressed the need to determine the roles and functions of the District Development Model (DDM) role players and the funding responsibilities to eliminate ambiguity. The FFC recommended that the review of capacity-building and infrastructure grants consider that capacity-building efforts are comprehensively consulted on and agreed to with the municipality.

On public sector institutions and investments, FFC recommended the establishment of explicit and progressive guidance to state-owned enterprises (SOEs) on expected rates of return and profit distribution or reinvestment.

Committee members welcomed the FFC recommendation to restructure the local government equitable share and to demand more accountability from SOEs. They asked about FFC independence; Social Relief of Distress (SRD) grant funding not being used and returned to Treasury despite so many needy South Africans; mismanaged SOEs being bailed out by taxpayers without analysis of why they failed; basic income grant; corruption and mismanagement at municipal level; the push towards renewable energy without considering revenue alternatives for municipalities; and the economic exclusion of many South Africans.

Meeting report


2023 DORB & Second Adjustments Appropriation Bill: FFC submission
Dr Patience Mbava, FFC Chairperson, led her team in presenting the FFC submission.

Second Adjustment Appropriation Bill:
The appropriation amounts to R9.5 billion and focuses on four aspects:
• R4.5 billion to national departments for costs for 2022/23 public service wage increase.
• R8.4 billion in SOE bailouts: R1 billion for South African Airways (SAA), R2.4 billion South African Post Office (SAPO) and R5 billion for Land Bank
• R300 million for Represented Political Parties Fund
• R3.783 billion of unspent SRD funds in Social Development Vote

• FFC fundamentally views bailouts as fiscally unsound and like it submission on the 2022 Special Appropriation Bill, the government must devise accountability systems and control measures to mitigate SOEs from indulging in morally hazardous behaviour. Pre-conditions and conditions required for bailouts, including financial and operational reporting have been implemented, however outcomes have been limited
• In the spirit of greater transparency and accountability, future Bills must be accompanied by more information/explanation of the rationale for proposed adjustments – example of allocation to the Represented Political Parties’ Fund
• With the first Adjustment Bill, R1.8 billion was unspent due to lower than anticipated take-up of the SRD grant because of more stringent grant eligibility criteria. The Second Adjustment Appropriation Bill reduces the SRD grant by a further R3.7 billion as a result of improved targeting.
• In light of persistent unemployment and worsening socioeconomic conditions that prevail and which disproportionately affect poor households, the FFC is concerned about the progressive erosion in the number of people accessing this grant as a result of tightening of eligibility criteria.

2023 DORB – Provinces:
• FFC notes with concern a 7.6% decrease in the District Health Programme in 2023 and recommends that Department of Health should indicate how these reduced resources are likely to affect service delivery and how this tighter budget would be managed especially given the expanded scope of the programme.
• While FFC supports funding for emergency housing needs as a result of flooding, it reiterates its previous recommendation that provinces and municipalities should develop adaptation and mitigation strategies to address natural disasters in the long term.
• FFC notes with concern the shifting of provincial and municipal emergency housing grants to National Department of Human Settlements. FFC recommends that shifting conditional grants to the national sphere should be the last resort as lower spheres of government are better positioned to understand delivery needs.

2023 DORB – Local Government:
• FFC notes the proposed increase in the total allocation to the local government equitable share over the medium term. However, FFC would like to reemphasise its previous recommendation of fundamentally reviewing local government transfers from the perspective of the vertical division of revenue. This review should include a proper re-examination of the assumptions used in the Local Government White Paper.
• FFC recommends that the review of capacity-building and infrastructure grants consider that capacity-building efforts are comprehensively consulted with and agreed to with a municipality; it should link capacity-building actions to a municipality-specific diagnosis of capacity challenges or deficits. It should consider the consolidation of local government conditional grants into an integrated financial flow.
• FFC stressed the need to determine the roles and functions of DDM role players and the funding requirements/responsibilities to eliminate any ambiguity. 

Public-Sector Institutions and Investment:
• FFC recommends improving corporate and fiscal governance through reforms that enable SOEs management boards the operational autonomy they require to make profit-maximising decisions and eliminating political interference to enhance operational transparency.
• FFC recommends the establishment of explicit and progressive guidance to SOEs on expected rates of return and profit distribution or reinvestment.
• FFC reiterates its recommendation that decisive judgement is made to deliver on return-on-investment. Failing which, dysfunctional SOEs should be restructured, sold off or shut down.

See presentation for further details.

Ms D Peters (ANC) asked if FFC can foresee South Africa implementing basic income support soon and how South Africa can finance and implement that. Is there a need to relook at the funding formula especially looking at challenges faced by the provinces? It is good that there has been a decision taken to help municipalities with Eskom debt. However there is a need to look at the total funding model for local and provincial spheres of government. We all stay in a geographic space called a municipality and we rely on municipalities to provide basic services such as water, electricity, sanitation, waste removal and their roads.

There is sometimes a very difficult distinction one needs to make between potholes on the national road and potholes on municipal and provincial roads. Due to capacity challenges in municipalities, there is a problem even to manage the Municipal Infrastructure Grant. The FFC is better placed to help government deal with the funding formula and how to structure the grants allocated to provinces and the local sphere.

Mr Z Mlenzana (ANC) noted the FFC comments on SOE bailouts. Can the FFC help the Committee understand how things will operate when SOEs are removed from Department of Public Enterprises and placed under the relevant government department for purposes of accountability. Will there be a double management confusion where if something needs attention the government department may claim that problem needs to be sorted out by the SOE's management? How would this rationalization work where an SOE is placed under a department but it requires stringent monitoring of its bailout conditions?

Mr Mlenzana asked if the identified distressed municipalities are responding positively to the complex service delivery challenges and revenue shortfalls in the Division of Revenue Bill.

Mr Mlenzana spoke about ensuring that district municipalities and metros are coordination and monitoring centres for the pooling of human resources so there is growth and monitoring but at the same time proximity to the end user. What is the view of FFC on the steady decline in the real growth rate of 2023/24 infrastructure grants with zero growth in the outer years?

Mr A Shaik Emam (NFP) asked FFC if they are able to be independent and objective enough and give the Committee a true reflection of where the country is. This is given that FFC could tell the Committee things that might affect the very same people that fund FFC. What is FFC's view that we are heading to a R25.8 trillion debt in the medium term. He spoke of the debt service costs given that the Committee does not know to what extent all our local governments and others are exposed to debt locally and internationally. He mentioned a municipality that has cash reserves for only two weeks. Do you think we are heading in the right direction with the amount we continue borrowing? South Africa does not need to borrow; it is because we are not getting value for our money for what we are borrowing.

Mr Shaik Emam noted FFC stated that 40% of supply chain goods and services are lost annually in South Africa which translates to hundreds of billions of rands. FFC correctly welcomes further allocation to local government and building that capacity which is the heartbeat of service delivery. That should be done. However, should the concern not be that the municipality level is where a lot of corruption, maladministration and tender rigging take place? Allocating more monies creates an environment for more money to be looted. We should be asking why there is no delivery of services because the mathematics show that money is being wasted and tenderpreneurs are making money and not delivering services.

Does FFC not think that we should also put in mechanisms to close those gaps so South Africa gets value for money and save hundreds of billions of rands a year? In local government, the municipal manager might be very skilled, experienced and qualified; yet you might find a mayor that has not been to school and cannot read and write. The municipal manager has to report to the mayor and politicians and this is worrying.

What is FFC's interpretation of the DDM? We just need two-tier governments – district and national. Does FFC not think there is going to be duplication and additional cost to some extent? There is talk about reducing the public sector wage bill, but all this is going to do is increase costs.

Mr Shaik Emam noted the allocation provided for negotiations on the public sector wage bill. What are the unions in this country worth? With all the money they make what do they put back into these employees in terms of benefits, empowerment, workshop training and creating jobs? They provide nothing but they make a lot of money and put added pressure on them. Does FFC think we are doing enough with the policies in place for economic growth and job creation in the different sectors? In Agriculture, we lost 10 000 to 12 000 jobs despite having some of the most arable land in the world. Together with that, the entire manufacturing industry has come to a standstill.

Would FFC agree that we talk about enhancing the private sector to create jobs but all we hear about in the SONA is how government is going to employ more people which pushes up the wage Bill which is not creating a conducive environment? Does FFC not think that the conditions on the ground are so stringent that SMEs cannot survive with the high labour costs, the pressure put on them by labour organizations and municipalities on requirements? They cannot be competitive enough particularly the lower local South African because foreign nationals in the country have an edge. They have an edge because they are not accountable as they are not paying taxes, there are no measures in place to ensure they comply with taxes. The competition for local businesses is so strict that they cannot survive.

Mr Shaik Emam asked if FFC thinks the government is sending the wrong message if it keeps bailing out municipalities. When are municipalities going to learn to be self-sufficient and put in measures to develop and give incentives to businesses there? Everybody in the rural areas is moving to the urban area. Municipalities receiving the Urban Development Settlement Grant are not even spending the given allocation. The same happens with the money put into infrastructure because municipalities are unable to spend it.

Another important factor is renewable energy. Municipalities rely on about 25% of electricity revenue they get. If a lot of people go off the grid, does FFC not think there is going to be a 25% reduction in municipal income?

Do you believe we are doing justice by continually giving bailouts to SOEs. The set conditions need to be met but they never get met. What would FFC do if they were in place of government? Would FFC make these into public-private partnerships so they are managed independently, or would you keep them under government and keep bailing them out at the expense of taxpayers?

Mr Shaik Emam asked FFC if it thinks government’s plan to introduce national health insurance (NHI) will be a success given the state of primary health care where we cannot attract enough medical practitioners and healthcare workers and there is crumbling infrastructure.

Mr X Qayiso (ANC) agreed with his colleagues on the restructuring of the local government equitable share so it can have an impact on the people. The Freedom Charter says the people shall govern and therefore everything starts where the people are at the local level. Can FFC explain why housing was moved from the local to the national sphere? This is important since things happen on the ground and the Committee needs to know how the local levels can act when there are emergencies and disasters, especially availability of housing during an emergency. What is the impact of the 7.6% decrease in district health on NHI as a whole?

Mr Qayiso agreed with the FFC recommendation that the SOEs play their developmental mandate. However, where necessary the state must intervene when SOEs are in difficulty and a mechanism must be put in place to ensure accountability because SOEs play a key role in development. The Committee should leave questions about the unions because those are the structures established in terms of a particular Act and they exist for the interests of their members. The Committee does not need to be insensitive when it comes to them. Rather we should redirect our energy to what was agreed on and the public service ethos. If there are gaps, the unions need to be consulted so that all parties are responsible for service delivery.

Mr O Mathafa (ANC) asked the FFC view on the state of coalition governments in municipalities as it relates to efficiency in municipal spending and service delivery provision. FFC talked about the decline in infrastructure grants in local government. He noted the FFC presentation the previous week pointed to the acceleration of infrastructure investment in the SOE space. Has FFC drawn a comparison to see if the SOE acceleration is linked to the decline of infrastructure investment in local government or is it just a natural process? He agreed that SOEs have an important role to play in the developmental state. However, most of the infrastructure development must be a local government competence because that is where the actual needs of residents and society are easily picked up through the IDP process so that government can respond.

Mr Mathafa asked for FFC’s view on the division of revenue, and if it is responsive enough to the complexities prevailing in the local sphere of government. The Auditor General states that monies are not spent in line with their allocation due to a lack of project planning and implementation and revenue shortfall due to the lack of revenue collection for the provision of basic services. So is the division of revenue responsive to these issues? What are the challenges faced by municipalities in financial distress. Is the division of revenue responsive enough to these particular challenges or simply put is it responsive to the state of local government?

Mr N Kwankwa (UDM) said while government is pushing renewable energy, it is also pushing a lot of resources into Eskom. However, it does not seem that municipalities are being prepared for a time when people are completely off the grid. A lot of municipalities depend on the mark-up they put on electricity from Eskom. As soon as people are off the grid completely then there will be municipalities that are going to be cash strapped and require constant bailouts from the very same taxpayers.

The other challenge is that encouraging people to get off the grid without also pushing Eskom to invest in renewable energy, then the problem will be that Eskom will not be able to generate enough revenue in the future meaning Eskom will perpetually be dependent on the taxpayer for bailouts. What can be done to ensure that municipalities do the necessary long-term planning for them to be able to benefit from renewable energy and also come up with solutions for renewable energy on their own. For example, without caressing the ego of the Democratic Alliance, you see it in the City of Cape Town metro coming up with initiatives that respond to the energy challenges but you do not see enough of that in the rural economies probably because of capacity and a host of other constraints.

Mr Kwankwa said there must be a different way in which we can assess and oversee the efficacy of the conditions set for bail-out packages. If the conditions in place were working, then we would have the desired outcomes and would not have to be bailing SOEs out year in and year out. It means there is something not right with these bailouts or the set conditions or how we oversee adherence and implementation of these conditions. Perhaps an international case study needs to be made where countries that ensure those conditions are adhered to and there is proper oversight to prevent further bailouts. We are moving in a vicious circle where conditions and promises are made by an SOE, then a couple of years down the line a different excuse is given for bailing it out. Perhaps a study needs to be done by research institutions such as FFC to help on this issue.

Mr Kwankwa said financially distressed municipalities affect everyone daily and that is why the Committee is dwelling on them. Is the division of revenue and adjustment budgets dealing with the resource needs of the municipalities and the capacity challenges? Is there a way to find out how many municipalities faced a particular capacity constraint? The Auditor General reports speak of the challenges, but you do not see the tracking of the progress in the municipalities to justify the Committee suggestion that there should be more cash injections to improve service delivery.

The Chairperson said that FFC presented some numbers in real terms and some in nominal terms This was confusing as it was hard to know when real or nominal numbers were being used. There needs to be consistency in the way the numbers are presented, and consistent with National Treasury presentations. What does the research say about the performance of previous Human Settlement Development Grants as this Committee always complains about the underspending of this kind of grant. FFC did not address economic inclusion-exclusion as would be expected. Remember that it is a constant imperative that we should deal with the economic exclusion of most of the people of South Africa. FFC needs to express a view as to exactly what is happening and what should be done about economic exclusion. FFC needs to show if we can deal with the 350 years of deliberate economic exclusion of the people. Are the provincial governments and the local governments factoring this in and what success are they having?

FFC response
Dr Mbava responded that FFC will factor in more coherently its stance on economy inclusiveness and how it can be strengthened. On the SRD grant and the possibility of a basic income grant, R3.7 billion of the unspent SRD funds is going to be sent back to Treasury. Previously R1.8 billion SRD funding was sent back as unused. This is concerning given that millions of South Africans are applying for the SRD grant and many are not being approved. In the context of the high cost of living, poverty and social distress it is indeed very worrisome how money is sent back that is meant to close the gap and ensure the many South Africans who are vulnerable have food on the table. If we are in a position to move forward with a basic income grant and to understand the reasons for this unspent money, it is important to understand the amended criteria for the SRD grant made by government.

A recipient qualifies for the R350 SRD grant if they can prove amongst other things that they earn below the food poverty line of R648. Your bank account is verified to see the funds in it do not exceed this amount. So if you have money that is in transit going to your family members via your account then Social Development will construe that as income. Many reports show that this has been the reason many people have been declined because their bank accounts show monies over and above R648 for various reasons. How fair that criterion is, remains to be seen.

Dr Mbava said the other criteria to get the SRD grant is based on the premise that you have access to internet data, or you have access to a smart phone to make your application. If you are unable to do that then you make your way to your nearest post office where the post office will do that on your behalf. However, it happens many times that those who go to the post office and are travelling long distances arrive there and are told the system is offline. It is very costly to travel and some do this repeatedly and give up and do not do the application. How fair is this process to the many South Africans in rural areas with no access to internet data, smart devices or smart phones? What is stopping Social Development from going to where the people are to ensure to assist them to enroll and apply because this application system may be a gatekeeping mechanism. Those who need the money are unable to access it due to the conditions and application system.

Dr Mbava said the SRD grant is a precursor to a basic income grant so if we are failing now to implement this SRD efficiently and effectively for the past two or three years, how successful are we going to be implementing a more permanent structure going forward. We need to look at the effectiveness of the instrument and the process we are using to ensure that as many people are brought into this safety net as efficiently as possible because quite clearly many people are kept out. The FFC in anticipation of its 2024 submission is working on a research study that will look at social grants with the idea of contributing towards insights into policy options as to how this basic income grant can be implemented effectively in an inclusive manner without draining the fiscus.

Commissioner Aubrey Mokadi noted that the FFC submission last year spoke about leadership and governance in local government specifically addressing fruitless and wasteful expenditure and lack of efficiency in line with what the AG had reported over the years.

The FFC is happy that in its interaction with both the Standing and the Select Committee last week there was an understanding that the Committees would begin to look at tracking FFC recommendations to see if they are implemented. That was not present before and hopefully that itself would then respond to this issue so that there could be a huge improvement in local government financial management. Therefore, FFC is aware that local government plays a very critical role and it could go as far as improving the local economy and this relates to the chairperson's concern about the economic exclusion of most black people.

It was indeed expected that much financial muscle generated for local government and infrastructure development at that level would help improve the economy at that level. Interestingly, the Gauteng provincial government in its State of the Province Address had specifically set aside some resources to support township economies. Hopefully, this would be a way to start monitoring and seeing how that has an effect in responding to this issue of the majority being excluded from the economy. However, rural provinces are still hugely affected so even if Gauteng were to achieve much it still does not address the rest of the country, especially in rural communities.

Commissioner Mokadi said the SOEs being subsumed into their sector departments in terms of rationalization was a policy issue where FFC has not been involved. The FFC has been limited to making efficiency and accountability recommendations in line with the current policy directives on the structure of SOEs.

Mr Chen-Wei Tseng (FFC Head of Research) noted that FFC will consider the advice not to use both nominal and real variables but keep them consistent. The FFC and the Committee in its discussion in one way or the other touches on economic inclusion as opposed to exclusion. For example, FFC has many times raised the higher unemployment rate as exclusionary since people do not get to be part of the economic workforce and reap the growth, income and productivity that comes with a job. In this round of the 2023 budget, it would not convince many to say that there is no money because clearly there is money that was given for other purposes – one being the Eskom bailout. So, funding-wise, it really is about value for money and although budgeting and money is important at the end of the day it is just a medium of exchange, a means of transferring value or facilitating exchanges. The actual benefit is economic value is moved along from people to people through transactions and ultimately raises the standard of living.

Mr Tseng said that SOEs need to have a competent CEO and a strong board that knows what it is doing. In its submission FFC is trying to emphasize accountability – specifically accountability of ministers because there has been a big governance failure and no one can dispute that looking at recent activities and developments. SOEs have been through this governance failure for the last three years so there is a problem. Now we have rationalization or the reassignment of SOEs to the individual function of sector departments. The question is what happened during those three years. There must be some lessons that we can learn for accountability's sake before we just transfer them out to sector departments to fend for themselves. It's part of not just accountability but also part of what informs policy decisions and a responsible government.

Mr Tseng said that performance of the Human Settlement Development Grant (HSDG) at provincial level together with local government's Urban Settlement Development Grant (USDG) has been reaching the 90% upper mark. The challenge is coordination, for example, building top structures but then the land use, water and basic services are not connected to those top structures which therefore might become irregular or fruitless and wasteful expenditure. That is when the AG comes in and complains that money has been spent but there are no real houses. We must very clearly make the distinction between infrastructure spending and investment across different spheres. For instance, Part B of Schedule 4 in the Constitution says that the functional areas of local government are electricity and gas reticulation but generation is not.

The biggest issue facing South Africa is generation because of load shedding. Money is flowing to Eskom which is an SOE as opposed to the local governments which only deal with reticulation and transmission. Infrastructure grants will flow to where the challenge is right now and currently that is in the generation of electricity.

On renewable energy, there needs to be clear accountability straight down to the planning and the future envisioning of the energy environment. It must be made clear.

Mr Tseng said that the FFC is independent and it has the support of the Commission led by the Chairperson.

The 28 February and 1 March 2023 minutes were adopted and the Chairperson adjourned the meeting.


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