Division of Revenue Bill & Second Adjustments Appropriation (2022/23) Bill: briefing

Meeting report

Briefing by National Treasury on the 2023 Division of Revenue Bill

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, introduced the briefing on the 2023 Division of Revenue Bill and 2022 Second Adjustments Appropriation Bill to the Standing Committee on Appropriations.

2023 Division of Revenue Bill

National Treasury reported that transfers to provinces increased at an average annual rate of 2.8%, with conditional grants growing faster than the equitable share. Local government has exhibited growth at an average annual rate of 7.4%, resulting from the higher-than-inflation growth of the equitable share.

National government shares experienced a decrease in shares, from 50% in 2022/23 to 48% by the end of the Medium-Term Expenditure Framework (MTEF). Provincial shares increased to 41.6%. Local government shares grew from 8.7% to 10.1%. Ms Fanoe said that this was the rebalancing of figures of the past.

NT assured that the redistributive shares to provinces and municipalities were equitable. This was as shares were prioritised for rural provinces and municipalities that could not raise their own substantial revenues.

Provincial Government Allocations

Mr Bongani Daka, Intergovernmental Policy and Planning Unit, NT, said provinces had been allocated R695 billion in transfers for 2023/34, accounting for 97% of provincial revenue. NT highlighted that R92.7 billion was added to the provincial fiscal framework. This consisted of R76.9 billion added to the provincial equitable share and R15.8 billion added to conditional grants.

Funds were added to respond to existing spending pressures, for projects approved through the Budget Facility for Infrastructure (BFI) and to repair and rehabilitate infrastructure damaged by disasters. In response to existing pressures, the majority of the allocations to the provincial equitable shares were added to the education, health, and carry-through costs of the 2022/23 wage implementation. Funds were also allocated towards water infrastructure in Coega Special Economic Zone (Coega SEZ) to cater to the expansion in the area over the MTEF.

On additions to the provincial conditional grants, funds were added to the education, transport, agriculture, health, and human settlements. Notable allocations included R1.6 billion to the Early Childhood Development Grant (ECD) and R1.5 billion added to the National School Nutrition Programme Grant to provide meals for nine million learners.

On transport, R6.8 billion was added to the Provincial Roads Maintenance Grant for the backlog in refurbishing provincial roads. R3.7 billion was added to the grant towards the building of rural bridges.

NT said that meetings were held with the National Department of Health concerning the measles outbreak in some provinces. NT requested that one of the direct conditional grants allow for funding to be used for the administration of the measles vaccine. This was proposed in response to the potential need that may occur over the MTEF. The District Health Programme Grant was identified as a source of funding for the administration of the measles vaccine. This would be under the oversight of the Department to ensure the administration is done correctly and funds will be used as required.

Local Government Allocations

Mr Letsepa Pakkies, Director: Local Government Fiscal Framework, NT, said that transfers to local government contributed 10% of nationally raised revenue. Over the  2023 MTEF, allocations to local government increased by a total of R14.3 billion. The largest increase occurred in the equitable share by R8.1 billion and R6.2 billion added to the direct conditional grant.

NT commended the R521.7 billion in total direct allocations for local governments to alleviate some of the financial pressures experienced in municipalities, especially the provisioning of basic services.

On the local government equitable share, NT reported an 18.7% in bulk electricity that had to be recuperated over the next nine months. However, Eskom has yet to determine what it will charge municipalities and various customers. NT reported 20.7% growth to ensure that basic electricity was fully subsidised.

On changes to local government allocations, NT discontinued the Municipal Emergency Housing Grant due to the challenges experienced. The Grant was shifted to the Department of Human Settlements. NT reported that the Department was actively increasing its capacity to be proactive when dealing with this matter.

The BFI received numerous new allocations to assist municipalities with access to basic services and infrastructure. NT welcomed this work done in conjunction with the private sector.

2022 Second Adjustments Appropriation Bill

Dr Mampho Modise, Head: Public Finance, NT, presented on money to be appropriated for expenditure, such as compensation of employees and funding the Land Bank. NT also shifted funding between votes to allow underspent funds to be relocated.

NT explained that the urgency of the Bill was due to the effective date for funding to be spent being 31 May 2023.

Public-Service Wage Increase

After the three percent increase from government, NT announced that Police was the largest Department to receive funding of R1.8 billion. NT was the only Department to not receive additional funding, as they absorbed the increase within their existing baseline.

South African Airways

NT decided to exit the business rescue process of South African Airways (SAA). R1 billion was allocated to deal with historical debt, including compensation of employees. NT said there were conditions to ensure that NT would not revert to funding SAA.

South African Post Office

NT reported that the South African Post Office (SAPO) failed to utilise funds to create a general plan, failed to take accountability for the R7.3 billion in funds provided, and experienced financial weaknesses. NT engaged with the Department of Communications and Digital Technology (DCDT) to finalise a credible turnaround plan. A critical condition for the R2.4 billion bailout included that SAPO must sell all non-core assets, including properties at market rates.

Land Bank

NT approved R5 billion for the Land Bank subject to conditions.

[See the presentation for conditions applicable to the Land Bank]

Discussion
Mr A Sarupen (DA) said that the 2023 Division of Revenue Bill failed to acknowledge the funding required due to the impact of load shedding on municipalities. He explained that as load shedding increased, it completely destroyed the finances of municipalities. This was due to the system for municipal funding being built on the framework of selling electricity at a profit to fund other municipal services.

He highlighted that NT’s presentations focused on Capex (capital expenditure) while not mentioning Opex (operational expenditure), which is affected by lack of funding. He noted that many municipalities had to purchase generators for water treatment plants and pump stations.

The losses caused by loadshedding and costs of generators have resulted in many small towns going without water for three to four days a week. Mr Sarupen said that this was due to the funding model in municipalities no longer working in an environment where you do not have electricity 12 hours of the day.

He said that Ekurhuleni is spending R17 million on diesel daily just to keep their IT systems going. Rand Water is also battling outages noted in Gauteng in the past week. He said that it was incumbent on NT to fundamentally review and change the funding model of municipalities.

He expressed disappointment that NT failed to address the impact of load shedding on municipal finances, their plans to mitigate this, funding water stations, and the continuation of municipal functioning.

He asked when NT would consolidate this information and bring revisions to the Division of Revenue in future years. He felt the projected increases over the MTEF would be insufficient to cover the impending losses.

Ms D Peters (ANC) appreciated the R528 subsidy towards indigence, although she felt it was insufficient. She asked what NT and municipalities planned to do to ensure that these pressures have been alleviated.

She recounted that, from 2010 to 2012, it was proposed that there is one meter per household, irrespective of having backyard dwellings on the property. This negatively affected these homeowners, impairing them from qualifying for the indigence grant. She asked NT what their plans were to work with the South African Local Government Association (SALGA) and Cooperative Governance and Traditional Affairs (CoGTA) on the matter. She felt that the best approach would be to pay-as-you-go for electricity.

On Social Relief Distress (SRD) Grant recipients who are the household breadwinners, she asked if NT was going to cover these households with indigence grants. If NT adopted this approach, how would it fund it?

On municipal debt, she asked which municipalities would be covered by National Government and what the total debts were. She noted that one province owed a municipality R800 million in debt. She asked whether these debtor companies would be blacklisted or named and shamed.

Mr O Mathafa (ANC) raised the problem of spending and completing programmes initiated at the municipal level. In the previous Medium-term Budget Policy Statement (MTBPS), NT made a pronouncement on six areas of intervention to assist municipalities.

He acknowledged the increase in allocations, although he felt there was underspending on the grants and allocated funds. He asked whether a particular process was in place to ensure that the identified areas were implemented, monitored and evaluated for impact.

He mentioned the Fiscal and Financial Commission’s (FFC) observation that the infrastructure investment was accelerating on the side of State-Owned Enterprises (SOEs) and decelerating on the side of other spheres of government. He asked whether the incapacity of other spheres would naturally lead to the investment migrating to SOEs.

He said that the Enterprise Resource Planning (ERP) emphasised economic development which could not be compromised. He said SOEs must fulfil their constitutional mandate of providing services and infrastructure.

He asked NT what their view was on the FFC’s observation. He asked what the reasons for this were, whether there was a way to ensure that the investment at the SOE level was not in vain, and what could be done in government to assist in spending grants.

He said that it may be necessary for the Members to meet with CoGTA or the ministry regarding the disjuncture in the corporate governance model.

He gave the example of eradicating the bucket system in schools. The Department of Water and Sanitation reported that they were capacitated. However, they lacked the bulk infrastructure from municipalities to complete the project. This exemplified the need to ensure municipalities are able to utilise the funds effectively to prevent reallocation in instances where there is a dire need for services.

On the usage of Section 139 by provinces, he suggested that provinces must be empowered to use this section for other areas besides financial and political instability. He felt that the failure of municipalities to institute the by-laws was in contravention of their constitutional mandate.

Mr X Qayiso (ANC) asked to what extent the Division of Revenue Bill investigated the national electricity disaster. He also asked to what extent the Bill covers the economic recovery plan, as he felt this was a key focus area.

On the Second Adjustment Amendment Bill, he expressed concern regarding retrenching about 6 000 SAPO workers. Although, SAPO failed to make many statutory deductions on behalf of these workers. He felt that this process should be put on hold and that turnaround strategies should be completed with the assistance of unions and interested parties.

He expressed disappointment that a turnaround plan had not emerged. He also felt that SAA must complete their matters, as no notable progress was seen.

Mr Z Mlenzana (ANC) asked what informed the vertical transfers, considering the FFC recommendations. He asked whether there was a measure of capacity before transfers were allocated.

Mr Mathafa welcomed the conditions attached to the recapitalisation of these entities, on the Second Adjustment Appropriations Bill.

The Chairperson asked NT how they decide whether an allocation is made through the equitable share, direct or indirect conditional grants. He used the example of ECD to ask why this fell under a provincial conditional grant rather than the equitable share.

He noted that the provincial and local emergency housing grant was ceased due to flexibility. He asked why this intervention was not adopted through all three spheres of government. He asked what the general message was that NT was trying to deliver regarding the Division of Revenue Bill.

On provisioning basic services, he asked what control there was over municipalities regarding electricity and water prices and mark-ups. It is the mandate of government to ensure that residents have access to these basic services. He asked whether the R6.7 billion and R10 billion formed part of the R70.9 billion.

On conditional allocations to provinces, he asked what NT meant by ‘pledging’ conditional grants in the Revenue Bill. He said that the strategic equity partner must pay the market value of SAA. He called on the Minister of Finance to ensure the proper valuation of this disposed-of asset. He asked what strategic equity partner would be provided to the entity. He also asked that all relevant information be shared with Parliament.

The Chairperson asked NT to ensure that rural communities will also benefit from these assets. This was in reference to the proper valuation of SAPO assets being disposed of. He said that the communities surrounding the land that will be sold must also be considered during this process.

NT Responses

Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, NT, felt it was important to have an in-depth briefing with Members regarding broader local government support. He noted that the equitable share for local government was R83.7 billion and R48.7 billion for grants. However, the overall budget tabled by municipalities constituted 28% of the total revenue pot for the disposal of local government. He estimated that the total budget was between R550-R560 billion. NT explained that the revenue for municipalities constituted of the equitable share conditional grants and their own revenue. NT recognised this was proportionately higher in a metro than rural areas.

On reconsidering the funding model, NT said that there was a consideration systematically reassess it. This followed a commitment previously mentioned by the Minister at a summit with the Minister of CoGTA.

Concerning the electricity crisis and possible funding, NT highlighted that disaster legislation requires that current resources must be used. NT asked municipalities to reprioritise their budgets. NT said circulars were issued to municipalities in early December 2022 and March 2023 based on the budget tabled.

NT and SALGA sent out a survey to all municipalities to provide detailed information on their challenges and the financial implications. These findings would be considered when determining whether to find additional resources or not.

NT asked that municipalities table their budgets by 31 March, which would afford them time to reprioritise their spending. NT assured that they would work with SALGA and DCoG when considering all inputs in the process.

On the Eskom Debt Relief Bill, he confirmed that municipalities were going to benefit from this process. NT said they were working on guidelines to assist municipalities with the criteria required for them to benefit.

From the total R254 billion package, R57 billion was owed to Eskom. He explained that the six priority areas would have conditions. A key priority area was the municipally tabled funded budgets. He noted that the previous year had 112 municipal budgets adopted by councils. After the NT assessment, it was reduced to 106.

On municipalities in financial distress, NT reported from the state of local government report that this decreased from 175 to 165. He said these results were based on 13 conditions, including financial and conditional grant performance. The local report has been published quarterly for the past 14 years. NT said they would share the information with Members on which municipalities met the criteria.

Regarding municipalities struggling to spend grants, NT indicated that there was R83.7 billion in the equitable share and R48.7 billion on grants. The annual amount of underspending was about R4 billion. NT said that they would share the systematic process with municipalities, which was in their budget circulars.

On interventions, NT commissioned a study in 2017 to determine the effectiveness of the intervention process. The study reflected that one out of the 119 inventions used in the four years was effective. The study concluded that national and provincial governments, and municipalities did not implement the legislation appropriately.

NT reconsidered the entire intervention framework. They conducted roadshows across the country with the two financial Deputy Ministers. NT also engaged with all provinces, MECs of Finance, and MECs of CoGTA. This was done to educate and capacitate staff on how the interventions should be done, going forward.

NT also provided the recommended mode of intervention for 43 municipalities identified as in crisis. The Municipal Financial Improvement Programme has been substantially invested in providing guidelines, circulars, and training and capacitation sessions for municipalities.

NT conducts roadshows and engagements with sector departments to indicate all changes in the legislation, ensure meaningful implementation, and provide assistance. He made an example of NT, MISA, and CoGTA assisting with municipal infrastructure.

On the debt consumers owe municipalities, NT said it was R289.8 billion. He agreed that national and provincial governments owed municipalities R23 billion. NT said that pressure was put on municipalities, provinces, and national spheres to honour their commitments. The Director General (DG) of NT issued multiple letters to Departments asking them to respect the law and fairly compensate municipalities for their services.

Concerning by-law enforcement, NT said that municipalities were reluctant to enforce by-laws at times. This required broader interventions from NT, SALGA and CoGTA.

Ms Ogalaletseng Gaarekwe, Chief Director: Provincial Budget Analysis and Intergovernmental Relations, NT, said that spending on conditional grants differed amongst the provinces. She used the example of 93% of the Education Infrastructure Grant budget. However, three provinces underspent by R200 million.

NT explained that unspent funds are relocated to provinces that require additional funding. The Health Facility Vitalisation Grant was noted as performing poorly. NT was surprised because they performed exceptionally during COVID-19, with high turnaround times.

The Human Settlement Development Grant was expected to improve in performance based on increases by the provinces within the current year. NT attributed delays to procurement issues and the construction mafia stopping work on site.

Regarding aligning budget transfers, NT noted this as a big problem. She gave the example of Human Settlements departments in provinces failing to account for the work done in the last three months of the financial year.

On alignment between provincial and municipal spending, NT explained that the budgets for provinces during benchmarks are analysed to see if funds are allocated to the required sectors. NT said that transfers to municipalities are required to be gazetted within the Revenue Bill timelines.

Ms Fanoe added on the topic of infrastructure spending in provinces but not at a municipal level. She said that these issues – the bucket system and human settlements – fall under integrated development planning.

Provinces must consult with municipalities prior to issuing rollouts. This was as provinces failed to align planning. She made an example of housing being provided in more affordable areas with fewer municipal services, rather than areas with municipal services and higher-priced land.

Mr Daka explained that provincial conditional grants for pledging entailed the MEC of Finance in provinces going outside the province to borrow funds. This allows provinces to provide service delivery infrastructure. NT said that provinces could use their future conditional grants to repay these loans.

This was done as municipal infrastructure generated revenue. Mr Daka said this was not the case in provinces, as insufficient funds were generated to repay the loans. NT recognised these shortcomings. Some provinces have put forward that they require a lump sum of money to address service delivery issues.

NT said obtaining a loan had to comply with the Borrowing Powers of Provincial Government Act. This required that provincial pledging must go through the Loans Coordinating Committee chaired by the Minister and MECs of Finance.

He made the distinction between pledging and front-loading. He said that pledging was provincial while front-loading occurred at a national level.

Dr Pakkies clarified that the R70.9 billion free basic services allocation included a portion of the R8.1 billion added. The remainder of the R8.1 billion contributed towards components funding the poor in municipalities for redistributive purposes.

The Chairperson asked about R6.7 billion in institutional funds and R10 billion for community services. He asked whether these funds formed part of the R70.9 billion.

Dr Pakkies said that those funds were specifically aimed at poor municipalities.

On solar panel provisioning, NT said that Eskom and municipalities would fund this in the following financial year. This included rooftop solar panels and other energy-saving devices which would be funded by the Integrated National Electrification Programme (INEP) Grant.

The grant from Eskom and the other from municipalities had a total allocation of R18.8 billion. Part of this was expected to be used based on demands from an application process through the Department of Mineral Resources. This will be refunded.

NT said that, at the time, it was unsure of how many would be available, as it was based on supply and demand. NT said that they would report back to Members once the business plans from spending agencies have been submitted.

On indigent policies relating to backyard dwellings, the National DCoG has policies to guide municipalities when they prepare their own indigent policies. NT said that the indigent policies covered these exclusions.

NT said that, from an operational stance, they were currently looking into how this would be funded through the equitable share and conditional grants. NT said that there was no discrimination regarding poor residential areas. NT said that they would look into providing guidance to municipalities.

Concerning the funding model, NT said that they had forums to look at this local government funding. NT recognised that the impact of load shedding differed between municipalities. This meant that a blanket approach could not be used and further data were required to inform specific funding decisions.

NT said that the unallocated funds were reserved for looking into finalising the Eskom issue. NT said this afforded the government time to look into issues the Revenue Bill aimed to address.

Regarding FFC recommendations, Ms Fanoe said that this was based on broad consultations conducted by national government. Recommendations that were broad in policy were implemented in a phased-in approach.

NT explained that they do not respond to recommendations unrelated to the Revenue Bill. This was as it was not directly related to the responsibilities of NT. In these instances, NT identifies these recommendations and refers them to the relevant departments to respond directly to the FFC.

On the equitable share and conditional grants, the Constitution entitles local government and provinces to an equitable share to provide basic services and perform functions. NT said that the majority of large functions allocated are funded through the unconditional equitable share.  

The largest sector components are provided through the provincial equitable share. The Constitution allows for additional funding through conditional grants with conditions to further support provinces and municipalities.

NT explained that the local government equitable share funds free basic services to poor households. She said that there are components to specifically support poor municipalities that do not incur high property rates to fund their general services.

NT said that conditional grants fund very important national priorities that need to be monitored, such as the School Nutrition Programme. The majority of conditional grants are infrastructure grants. NT said that direct conditional grants are allocated to the sphere responsible.

In instances where provinces lack the capacity to roll out the infrastructure themselves, indirect conditional grants are used. NT said that national Departments roll out this infrastructure on behalf of and in collaboration with the province. NT said they would share the inputs from national, provincial, and municipal views on the conditional grant system with Members as things unfolded.

NT wanted to ensure the continued provision of basic services by provinces and municipalities to communities. NT said that the increased allocations would enable provinces and municipalities to deal with the additional costs of providing services and extend access to services.

Good and efficient service delivery of public services uplifts the lives of the poor and supports overall economic growth in the country. NT said that, while they provide the allocations, the actual service delivery depends on the concerned provinces and municipalities.

On municipal mark-ups on electricity and water, NT said municipalities struggle to determine cost-effective tariffs. NT reported that many municipalities take the previous year’s tariffs or CPI and increase tariffs for the new year.

NT said that there were no additional tariffs added to water. Previously, municipalities charged exorbitant electricity tariffs. NT reported that this ranged up to 50% in surcharges which required regulation. Due to the increases in electricity rates, municipalities have limited or stopped surcharges on electricity.

NT said that they were currently determining to what extent surcharges exist. NT said that, through the Municipal Powers and Functions Act, provision was made to regulate municipal surcharges.

Mr Hattingh said NT advocates that municipalities run their operations as a business. NT created extensive guidelines and tools to train municipalities. NT had advised municipalities to minimise the increases relative to inflation. Where surcharges are higher, with substantial reasoning, NT requires that these municipalities disclose this in budget documents.

As part of the MSCOA (Municipal Standard Chart of Accounts) reform, NT has set up accounts to determine what municipalities do with the equitable share, the full costs of tariff services, and to systematically ensure municipalities recuperate the costs.

NT was mindful that some poor households could not afford this, which is accommodated by the provision and the equitable share. NT was working with municipalities to ensure they created meaningful budgets to give effect to the service delivery requirements of the Constitution.

On the vertical division to local government, Ms Fanoe said there was a task team endorsed by the budget forum. NT agreed to look at this issue as part of the review. Parliament also had a summit that agreed that the issue needed to be addressed. NT said that the work done in conjunction with SALGA and DCoG would ultimately feed into the budget process.

NT clarified that there was no formula in place for the vertical division between the spheres of government. Rather, that is informed by political priorities and budget availability. NT assured that this work was ongoing and receiving attention.

Dr Modise said getting SAPO to present a turnaround budget to Members was critical. NT said the strategy SAPO presented to them required a smaller post office. This meant that inevitably some employees would have to be let go.

She agreed there must be concern for how this would affect the surrounding communities. NT emphasised to SAPO that this must only be on non-core assets. Once the independent asset assessment is completed, NT will work with SAPO to ensure the funds are recuperated.

Mr Ravesh Rajlal, Chief Director: Sectoral Oversight, NT, said that NT wanted to review the SAA sale to ensure no further fiscal obligations. NT wanted to understand from the head of council what funding would be provided, the terms and conditions, and that all guarantees with SAA are cancelled.

The Chairperson thanked the NT delegation for the presentation and the responses to the Committee’s questions and inputs.

Consideration and adoption of meeting minutes

Mr Mathafa moved for the adoption of the 15 February minutes.

Mr Mlenzana seconded the adoption.

Mr Mlenzana moved for the adoption of the 17 February minutes.

Mr E Marais (DA) seconded the adoption.

Mr Qayiso moved for the adoption of the 23 February minutes.

Mr Mathafa seconded the adoption.

All minutes were adopted without material changes. 
 
The meeting was adjourned.