Committee Report on 2015 Division of Revenue Bill

Meeting report

Recommendations on 2015 Division of Revenue Bill

Mr Jan Hattingh, Chief Director, Local Government Budget Analysis: National Treasury (NT) said the briefing aimed to provide the Committee with feedback on the Committee’s recommendations in respect of the 2015 Division of Revenue Bill. It should be noted that the Minister of Finance had responded to the Committee’s recommendations on the Bill in the Budget Review document that had been tabled with the Budget. Nonetheless, this did not preclude the Committee from requesting National Treasury to provide a progress or interim report on the recommendations made.

Ms Wendy Fanoe, Chief Director, Budget Policy Planning: NT, said the Division of Revenue Bill had been tabled on 25 February 2015 and passed by the National Assembly on 12 March 2015. The Select Committee on Appropriations and nine provincial legislatures had held hearings on the Bill. The Select Committee had tabled its report in the National Council of Provinces (NCOP) on 5 May 2015. The NCOP had passed the Bill and adopted the Committee’s report. The report contained seven recommendations. The Bill had been enacted on 1 June 2015 as Act 1 of 2015.

In terms of recommendation 1 – alignment of budget with core priorities -- the National Treasury should exercise its constitutional mandate to ensure that the budgets of the various spheres of government were in compliance with the core priorities as outlined by the National Development Plan (NDP), the 2014-2019 Medium Term Strategic Framework (MTSF), the Provincial Growth and Development Strategies and Municipal Integrated Development Plans. NT agreed that it had an important role to play in providing oversight and guidance for provincial and municipal budget processes. In carrying out this mandate, NT must also respect the decision-making powers of the other two spheres of government to set their own priorities and budgets. National government used several mechanisms to influence priorities in other spheres. National departments had the power to set norms and standards. The constitution required provinces and municipalities to participate in national programmes. Some national priorities were also funded through conditional grants. NT also used the process of benchmarking provincial and local government budgets to ensure that national priority programmes were adequately budgeted for. Intergovernmental forums were also used to discuss and agree on budget priorities between the spheres. National and provincial governments had a responsibility to support and strengthen the capacity of municipalities.

Ms Fanoe said that in terms of recommendation 2 – unfunded mandates -- the Financial and Fiscal Commission (FFC) should also be involved in the ongoing discussion between NT and the South African Local Government Association (SALGA) on the issues of unfunded mandates within municipalities. NT agreed with this recommendation and would include the FCC in all interdepartmental discussions on unfunded mandates. The Budget Forum had agreed in July 2015 that uncertainties and inconsistencies in the assignment of functional responsibilities was the root cause of many unfunded mandates and had requested the Department of Cooperative Governance (DCoG) to lead a process to respond to these issues. The FFC had participated in the preparations for this item at the Budget Forums and would be involved in the discussion of the outcomes of the process being managed by the DCoG.

With regard to recommendation 3 – efficient spending of conditional grants -- NT and other sector departments administering conditional grants should introduce innovative measures that would ensure efficient, effective and economical spending of such grants. NT agreed on the importance of continuing to improve the efficiency and effectiveness of spending on conditional grants. The review of local government infrastructure grants was intended to improve grant implementation by restructuring them to better align the incentives for municipalities to implement cost-effective infrastructure, and to improve the oversight and support offered by national departments.

In the 2016 budget process, NT would pay closer attention to the capacity which departments devoted to managing conditional grants and would encourage them to reprioritise additional resources towards grant administration. Additional capacity should enable grant administrators to be more innovative in the way they oversee and provide support for the implementation of grants. Incentives in provincial infrastructure grants encouraged improved performance by requiring and rewarding improvements in the preparation and planning that had to be done to make efficient and effective spending possible.

Ms Fanoe said that as far as recommendation 4 was concerned – human settlements conditional grants -- NT should facilitate a process whereby stakeholders could interact in order to resolve the outstanding issues relating to both the Human Settlements Development Grant (HSDG) and the Municipal Human Settlements Capacity Grant. NT agreed that processes were needed to resolve outstanding issues on these grants. NT and the Department of Human Settlements had agreed on the 2015/16 grant framework and allocations for the Municipal Human Settlements Capacity Grant, and any further changes to the grant would be discussed as part of the 2016 budget process. NT had proposed that the HSDG be reviewed as an extension of the review of local government infrastructure grants that was already under way.

In terms of recommendation 5 – municipal debt -- NT should facilitate discussion among the relevant stakeholders to look into this issue. Such stakeholders should include, but may not be limited to, the NT, SALGA, the FFC and DCoG. NT agreed on the importance of consultation on this issue. It had met with DCoG, SALGA and the FFC several times to discuss these issues and had worked together to prepare the input on this item that had been presented to the Budget Forum on 8 June 2015. NT had also invited DCoG and SALGA to participate in the meetings with municipalities affected by the withholding of the equitable share. Once this process had been concluded, NT would write up a document drawing out the lessons learnt from this process.

Ms Fanoe said that with regard to recommendation 6 – withholding funds -- NT should brief Parliament about the situation with regard to the municipalities whose equitable share had been stopped. Officials from NT had made presentations to the Select Committee on Appropriations as per the Committee’s recommendations on 21 April 2015 and 13 May 2015. In addition to the briefings to Parliament, presentations had also made to the following forums: the Presidential Coordinating Committee (PCC) (12 June 2015) and Technical Presidential Coordinating Committee (28 May 2015); the Portfolio Committee for Cooperative Governance and Traditional Affairs (12 May 2015); and the Forum of South African Directors General (4 May and 1 June 2015).

In terms of recommendation 7 – scholar transport – the national Department of Transport (DOT) and the Department of Basic Education (DBE) should brief Parliament on the latest developments regarding finalisation of the scholar transport policy. This recommendation applied to the DOT and DBE. Cabinet had approved a new national learner transport policy in May 2015.

Ms Fanoe concluded that NT appreciated the oversight work and recommendations of the Select Committee on Appropriations. Formal responses from the Minister of Finance would be submitted before the Medium Term Budget Policy Statement (MTBPS) was tabled. Further progress in addressing some of these policy issues would be seen in the 2016 Division of Revenue Bill.

Discussion

Mr C De Beer (ANC, Northern Cape) thanked the NT delegates for providing the Committee with fresh information. He referred to the issue of learner transport expenditure as of 31 December 2014, and said that in terms of the document circulated to the Committee, it was very crucial that they called the DBE to come and explain because his province, the Northern Cape, had a small figure of 8% for spending.

Secondly, he had given a document to Ms Fanoe which referred a letter from the Premier’s office to the Director-General regarding funding for the establishment of the Provincial Planning Commission. That was the first step which they had to take to deal with that document through their processes. He has also requested the researcher to do an analysis of other provinces on what they were doing in respect of a planning commission and funding.

Mr De Beer said that the other point regarding the Division of Revenue was the request for the bulk water supply for John Taolo Gaetsewe District Municipality in the Northern Cape to be treated the same as Pixley ka Same District Municipality in the Northern Cape, and the Namaqua District Municipality.

Mr De Beer said that in terms of the municipal support programme on finance, he would like to acknowledge the value of the work done by Mr Hattingh and Ms Fanoe at the National Treasury. The Magareng Municipality in the Northern Cape, which was 73 kilometres from Kimberley, had a formal request that had been tabled before the Committee for assistance from the NT, like it had assisted other municipalities on financial management. That municipality had been in dire straits and had been under administration since 1998. It had come out of that situation through good governance, but were back to square one and needed assistance from Treasury.

Ms T Motara (ANC, Gauteng) thanked the NT for its responses to all the Committee recommendations. It was encouraging to note that they had worked on all the recommendations, and it would be interesting to see when the Minister tabled the Medium Term Budget Policy Statement (MTBPS) because it was where Members would see if they had taken into consideration what the Committee had recommended and factored that into the MTBPS.

Ms Motara said that Mrs Fanoe had stated that there were many conditional grants. Just focusing on local government debt -- money owed by municipalities -- it had been suggested that in order to solve the problem they should get all the role players together, like SALGA, CoGTA, NT, etc in order to address the issue. However, some of the issues were even beyond the role players that were listed. For example, the Department of Basic Education was not speaking on scholar transport policy. There were some schools that were getting grants to pay for transport services and were supposed to pay whatever amount to municipalities, but were not paying for services. That money was being used somewhere else, and they were not accounting for it. However, what they had done in Gauteng was that Provincial Treasury had ring-fenced grant funding that was supposed to go to municipal services, and paid municipalities directly. It went to the school so that the school paid for services. The point was that municipalities were owed millions and billions, but it was not just the role players on the surface that they needed address, but everyone that was accessing services -- the clinics, for example, that accessed services from the municipality. If municipalities relied on income from the selling of services, they were really in deep crisis.

Therefore, in addressing the issue of money owed to municipalities, there needed to be a more holistic, and very detailed, approach and breakdown. Maybe this was something other select committees could deal with, and at a later stage they could focus on each and every grant and how that grant was actually being spent. It was also something which could be looked at from the side of National Treasury, using the framework the Gauteng Province had used to create a formal system so that other provinces could follow in the same direction. Those grants should not go to the departments, but rather to the provinces through NT and be paid directly to municipalities. NT could comment on whether the Gauteng framework could be used by other provinces to see if it would yield desirable results.

Ms E Van Lingen (DA, Eastern Cape) highly appreciated the presentation from the NT delegation because when they were at the provincial week in the Eastern Cape, CoGTA had indicated that R759m had been paid to the municipalities in the 2015 financial year, and a further R82m had been paid over in March and April of the current financial year. However, they had not been sure whether that was to settle outstanding debt, because the first sentence in the presentation had stated that outstanding debt payments had been facilitated by CoGTA, and then the amounts had been given. They had not been able to pinpoint that amount then. The scary thing was that when SALGA had addressed the provincial delegation, they had stated that R198m owed to local government by national and provincial governments was still outstanding on 31 March, which was a difficult situation they needed to know about.

Ms Van Lingen said that with regard to priority creditors, she was glad that South African Revenue Services (SARS) had stepped forward because when they had had a case of pension fund money being deducted from the municipality and not paid over to the insurers. The National Prosecuting Authority (NPA) had ruled that the pension fund should be treated as a priority creditor, like SARS. She asked what progress has been made with regard to the investigation into what funds municipalities were using for pension funds, as Mr Hattingh had promised to provide them. What facts and figures had been provided by Eskom on the debt owed by municipalities? A progress report should be provided.

Ms Van Lingen said that the land issue was a very big thing in local government. When there had been a public debate on the issue, the Department of Public Works had told them that 99% of the properties had a municipal value attached to them. She had asked the last time how many of those properties had actually been identified and what Mr Hattingh had said was very worrying, because the NT was not sure to whom the properties belonged, and who was responsible for the payment of the rates on them.

Ms Van Lingen said a demarcation process coming, and that process was not part of the budget. When they had approached the Minister of Finance, he had said they could not budget for something that was not realistic or part of the programme. However, to amalgamate a municipality with another was a very complicated matter because the grant funding they were pooling was like getting married. When the Committee had done oversight, they had been told the debt of municipalities would be paid out of the grant funding. But one municipal official had told them they could not use the grant funding to pay municipal debt. She asked where that issue fitted into the picture and how the grant reshuffle was going to be operated and protected to ensure that municipalities were responsible for their debt, because it was a very worrying problem.

Mr F Essack (DA, Mpumalanga) asked the presenter to explain recommendation 2 of the presentation which referred to unfunded mandates. How did those unfunded mandates happen, because it was part of the Integrated Development Plan (IDP) to have planning for municipalities?

He asked for clarity on recommendation 4, which referred to the human settlements conditional grant, where it was stated that “National Treasury has proposed that the Human Settlement Development Grant be reviewed as an extension of the review of local government infrastructure grants that were already under way”.

Mr V Mtileni (EFF, Limpopo) said that the issue of billions owed by municipalities was a serious concern. It had become a norm year in year out. However, they had seen that municipalities were being owed money themselves, but nothing seem to come to the fore with regard of assisting them in return. Recently they had attended a provincial week where these matters had been raised in the Limpopo legislature, and people were saying municipalities were owed millions, but even if they received those millions they were doing nothing with them. When the Auditor-General checked their books, most of them got adverse opinions and disclaimers, which was a worrying factor. Most of the municipalities could not fend for themselves and even if they received the funds, they did nothing with them.

Mr Mtileni asked if provincial departments should talk to NT before they dispersed money, because that was where they had experienced the problem of misappropriation of funds, and in the end nothing happened to those who misappropriated funds. They should come together as Committees to see how they could best assist those municipalities.

The Chairperson said that Members had raised concerns over the issue of conditional grants and in the upcoming oversight visits of the Committee they would be dedicating more time to this. However, the important thing when focusing on the conditional grants was to recognise that they were for basic services, and they would need coordination and support from Treasury.

The Chairperson said that the provincial week had revealed that there was no understanding of how the equitable formula worked in the municipalities. In the last discussion of the formula, NT had said that there would be ongoing refinements based on their discussions with SALGA, which would continue.

National Treasury’s response

Ms Fanoe said that with regard to the status of the planning commission, it currently resided with the Premier’s office. The NT did not have specific details on the matter, or how funding was being provided, except that it was funded through the Premier’s office. What National Treasury needed to do was to contact the Provincial Treasuries to ask for more detailed information in that regard and provide a more detailed report to the Committee.

With regard for the request concerning bulk water, NT would forward that request to their relevant public finance officials, as well as the Department of Water Affairs (DWA). It would be considered as part of the 2016 budget, but of course this did not mean funding would be made available. It should be highlighted in this regard that NT had had a meeting yesterday with a number of departments and one of the things which was currently taking place was a move from the Department of Water Affairs and the Department of Cooperative Governance to try to bring some alignment in terms of municipal funding. Some work had been done by the DWA and the Infrastructure Agency, but there was no alignment between water and sanitation with regard to the projects. Therefore, there should be an overarching municipal infrastructure plan on what was required to be funded in terms of the overall value chain, and more collaboration with the national departments was necessary.

Ms Fanoe said that with regard to the demarcation process, what the demarcation board had done was to put forward the ones from the original list they said they would investigate, and the intention was to have an answer ready around end of August. They were awaiting an announcement soon. It was important to highlight what the Minister of Finance had said about how they allocated funding. It was important to remember that municipalities were structured the way they were currently, and when re-demarcations happened, municipalities could become one. What needed to happen was for transition funds to be made available for a few years and then transferred to the newly established municipalities. Therefore, it would a bit challenge for municipalities, and what they needed to do between now and the 2016 or 2017 Division of Revenue Bill was to change all the allocations and the names of the municipalities that changed in terms of the financial year budgets, and this would be determined by the time elections took place,

Ms Fanoe said that with regard with unfunded mandates, there were some historical legacy issues where things had changed, but the situation remained the same to some extent. A good example of that was municipal health. In terms of pre-1996 constitution and before the Health Act came into operation, municipal health used to be quite a big function in metropolitan areas and cities, which provided extensive clinic services. Therefore, when the legislation had been changed, this had become largely a provincial function, although municipalities still continued providing it and in certain cases, it was the function of provinces. In the metropolitan areas, the issue remained a “grey area.”

In terms of what grants the Committee should focus on, they should not look at grants individually but rather look at them collectively. However, it would be useful to look at the water grant, which was inclusive of other four grants, and also the municipal infrastructure grant (MIG), because all of those were in collaboration and complementing each other.

With regard to the local government equitable formula and the ongoing retirement fund, there was a technical task team that was looking at these issues, as well as the costing of municipal services.

Mr Hattingh referred to the aspect of municipalities which the National Treasury should consider for support. He said that under the new management programme, one of the new features was that they had got a steering committee in which provinces were part of the decision-making process. In the past, it had been run by NT which took the decisions, and they felt it was not helpful. One of the recommendations and decisions they had managed to secure via the Presidential Coordinating Council (PCC). The President and the Deputy President had been very helpful because part of the withholding of the equitable share had been one of the recommendations to try and tackle the culture of non-payment in society. This was one of the key decisions that had been taken at the PCC meeting on 12 June 2015.

Linked to that was a proposal from the Minister of Finance in Gauteng which she had coincidentally presented when the matter was discussed at the budget forum and budget council meeting, and had then shared the experience with other provinces. They had thought that it was a progressive stance that the Minister had taken, and were advocating and would ensure that all the provinces would follow the same route. Legally, it was a first charge in the revenue fund, and in the national context debt was a first charge. They could almost argue in the same spirit to procure what the provinces owed to municipalities, but the difficulty was that in their position it was not constitutional for Treasury to take the equitable share and pay creditors on behalf of municipalities. It was something they would not explore, because it would not help the system going forward. However, where the provinces sit and how they manage their finances and the whole revenue fund, it was legally possible and all provinces had committees that oversaw municipal debt. Coincidentally, in this withholding process they would ensure that KwaZulu-Natal and the Western Cape were not of that process.

Mr Hattingh said that as far as the investigation of the SARS pension money was concerned, they had seen that in the provinces as well, that there was a tendency not to pay over payments to SARS and pensions to the government pension fund. NT had tightened up their oversight and monitoring responsibility in order to improve the situation. He had managed to secure funding for the work they were committed to do. NT would do the technical work, as they firmly believed it was the right thing to do. They would come back to the Committee and report on progress from time to time.

The Chairperson thanked the delegation from Treasury for their presentation. The Committee was looking forward to their next engagement. He stressed that there was a need for the Committee to hold a workshop with the Treasury so that they could be trained about the information they were getting from Treasury.

Minutes of 25 June 2015

Ms Motara moved for the adoption of the minutes. Mr Essack seconded the motion. The Committee adopted the minutes.

The meeting was adjourned.