2013 Division of Revenue Bill: inputs by National Treasury, Financial and Fiscal Commission & South African Local Government Association

Meeting report

2013 Division of Revenue Bill: presentation by National Treasury
Mr Kenneth Brown, Deputy Director-General (DDG): Inter-Governmental Relations, National Treasury (NT), introduced the delegation.

Ms Wendy Fanoe, Chief Director: Integral Policy and Planning, NT, said that during the discussion on the 2012 Division of Revenue Act (DORA), recommendations had been made on issues that impacted on DORA. There had been subsequent developments. Some corrections had had to be made due to some technical errors. There had been a clear decision on the Department of Basic Education (DBE) allocation. The Department of Health (DoH) had strengthened its internal monitoring. Provincial treasuries had to submit their budget to NT to ensure that there was alignment. Two benchmarks had been introduced, focussing on health and education.

Ms Fanoe said that provision was made in DORA for more accountability. A key decision was taken in 2012 over the interaction between NT and the South African Local Government Association (SALGA). The latter was now included in technical meetings with national departments. They could indicate if the grants were being used effectively

Ms Fanoe said that two specific clauses had been allowed to make provision for some retrospectiveness. This change would become permanent. If new conditional grants were established, they would only become effective on the passing of DORA. SALGA was increasing its support to municipalities.

Ms Fanoe said that reports were being submitted to both provincial and national treasuries. Members of the Executive Committee (MEC) needed to clarify issues raised during provincial hearings. Many of these revolved around the equitable share formula. There had been a lot of progress on property rates and billing. A proactive approach was being taken.

Ms Fanoe said that DORA started as a thick document but became thinner when enacted. The information which fell away was published on the NT website. The process was only complete when DORA was enacted.

Ms Fanoe said that some changes had been introduced to provincial infrastructure grants (PIG). Only provinces that had demonstrated their ability to use funds would receive allocations. Three grants had been consolidated into one, allowing for money to be shifted more easily. A portion of the health infrastructure grants had been converted and would be controlled by the national department. A service level agreement would be put in place.

Ms Fanoe said that the assignment of Department of Human Settlements (DHS) functions to six local authorities would be made in June. There would be a smooth transfer from the provinces. The same would apply for public transport, with the City of Cape Town the first recipient.

Ms Fanoe said that provision would be made for funds to be made available in the event of a natural disaster. The transfer was often too slow to assist with infrastructure costs. It would no longer be necessary to wait for the budget process. Another clause that had been added made provision for the Minister to exempt certain authorities, stipulating the circumstances under which exemptions could be provided. Certain grants dealt with both provinces and municipalities. This had been tightened up.

Mr Steven Kenyon, Director: Local Government Budget, NT, said that DORA was part of the national budget. The country's fiscal position was the starting point. There was still a major deficit. The plan was to bring the budget back under control in the medium term. The gap was being financed through borrowing. No more money was available.

Mr Kenyon said that government was budgeting for slower growth. Growth in national department expenditure was being trimmed. There had been a re-prioritisation process. Spending had been reduced. Efficiency would be increased and waste reduced. The 2011 census results had been published, and this made an impact on the provincial allocations. There were different growth rates in the population of the different provinces. That in Gauteng was almost double the national average of 16%, while the Free State was only 1%. It was even more dramatic at municipal level.  A municipality in the Northern Cape, Gamagara, had more than doubled its population. At the other end, some rural towns had shrunk. This would have an impact on allocations. Backlogs in service delivery remained a challenge, although those in electricity and water provision had decreased. Sanitation services were at the same level. Far more households now had access to services.

Mr Kenyon added that DORA was tabled in the context of a strained fiscal background with more people to serve. More had to be done with the available resources.  One measure was a new equitable share formula. In the health sector, there had been a major reconfiguration in the grants. There was a new system of PIG. There was a new grant to eradicate water backlogs.

Mr Kenyon presented a table reflecting baseline changes. There had been a substantial increase in grants to provinces and municipalities. There were increased allocations to health, social development, education and infrastructure such as roads.

Mr Kenyon presented the division of revenue. Local government allocation increased to 9% of the total spending while provinces' declined slightly to 43%. National government was receiving the same percentage.

Ms Fanoe tabled the total allocations per province, and in which areas. A total of R337 billion would be transferred to provinces in the form of the equitable share formula, and a further R76 billion in the form of conditional grants. This was a total of R414 billion. Provinces needed to be more efficient, with reductions of between 1 and 2%. Key priorities had to be addressed. There was an impact on provinces that had not grown as fast as expected. Four provinces had been affected. Another key development was that the property rates fund had been incorporated into the equitable share allocation. The rates allocation would still be protected for the following three years.

Ms Fanoe said that the provincial equitable share formula was updated every year. The only factor which really caused changes was the 2011 census data. The Eastern Cape, Free State, KwaZulu-Natal (KZN) and Limpopo had negative population shifts. These provinces would receive buffer funding while they got used to the new allocations. The provincial equitable share formula had six components.

Ms Fanoe said that there had been changes in the road maintenance grant. The length of the network, amount of traffic and weather conditions were the factors considered as these impacted most on maintenance costs.

Ms Fanoe said that provision had been made for the 2014 African Nations Championship health and medical services grant. All provinces that complied with the requirements would be allocated funds for infrastructure development. Contractual arrangements could then be made.

Ms Fanoe noted that it was important that provinces be supported in implementing the new approach. This had been communicated in the previous years.

Mr Kenyon said that R5.4 billion extra had been allocated to local government. This increased the total allocation to R12 billion, of which R8 billion would be in the form of direct and the balance in indirect transfers. The rising costs of free basic electricity grants would be covered, and there would be support for poor municipalities. Funds were being allocated for the upgrade of the national electricity system. Additional funds had been allocated for water infrastructure. The rural roads access grant was still paying for municipalities to draw up a database of roads needing upgrading. More interns would be funded with scientific and engineering skills. An allocation had been made to host the 2014 African Nations Championship.

Mr Kenyon gave a summary of the new local government equitable share formula. Subsidies would be given to low income households. Municipalities which struggled to collect revenue would receive higher allocations, but would not be rewarded for inefficient collection of available revenue sources. The new formula would lead to substantial changes in allocations to some municipalities. The new formula would be phased in over five years.

Mr Kenyon said that the structure of local government conditional grants would be changed. Interim infrastructure would be used to accelerate the provision of water to households. There was a partial shift in funding from the Municipal Infrastructure Grant (MIG), where there had been underspending. There was a new grant for public transport operations, but it was not new money. Grants would be given to metros for infrastructure development. The rural household infrastructure grant would become a direct grant. The MIG formula had been updated and would be phased in over three years. The structure of local government infrastructure grants would be reviewed during 2013.

Mr Kenyon said that the Neighbourhood Development Partnership Grant (NDPG) had been reviewed. Projects not aligned to the new grant could still be completed. The Department of Rural Development and Land Reform (DRDLR) would take over these projects in future. This meant that the allocations planned for this grant had to be amended to match the new strategy. Some negotiations with municipalities had gone beyond the normal deadline and final allocations had not gone into the Bill due to an oversight. Corrected allocations would be circulated. There was a similar error with the Integrated National electrification programme (INEP) and approach to distribution asset management (ADAM).  R320 million had been allocated to the INEP

Mr Kenyon said that the Fiscal and Financial Commission (FFC) was required to submit recommendations on local and provincial allocations. A wide ranging set of recommendations had been submitted. Government would only provide a response on those allocations linked to the 2013/14 DORA. Other recommendations would be dealt with by a separate process. On government spending and employment, NT's response was that government had a number of job creation initiatives. NT agreed on the financing of e-education. Government was reviewing the local government functional and fiscal framework in the face of climate change in the rural areas. Sustainability would be part of this review. Alternative financing for disaster management would be taken into account. More financial capacity to deal with such disasters would be provided. Government was committed to funding the green economy. Government agreed that the ability of local authorities to raise their own revenue should be considered. Government also agreed that funding should be based on powers and functions. Steps had been taken to streamline capacity grants.

Mr Kenyon said that in terms of the indirect links to DORA, government agreed with the FFC that successful e-education consisted of an ecosystem that included both content and technology. There was agreement that there should be full cost accounting for waste management services. Provinces and municipalities should continue to invest in physical and human capital in line with the New Growth Plan and National Development Plan (NDP). Government was working with local municipalities to build their administrative capacity. Minimum capacities in the Municipal Finances Management Act (MFMA) had to be enforced. Gender responsive budgeting was supported.

Discussion
Mr S Mazosiwe (ANC, Eastern Cape) said that there was an assignment contained in DORA itself. Generally one heard little about this. Regarding the census, he asked if the grants spoken about affected the people in informal settlements.

Mr J Gelderblom (ANC) asked for clarity on the new grants. He asked how the youth could benefit by new jobs, especially in road construction.

Mr G Snell (ANC) noted the three year buffer. He asked how realistic it would be for provinces to reduce their spending. Infrastructure and staff had been planned on the previous figures. While spending could be cut in certain areas, such as the number of text books bought, maintenance and staff costs would remain the same unless there were cuts.

Ms A Mfolo (ANC) asked if provinces and municipalities had submitted their plans already. There had been a lot of underspending. He asked if anything had been done about this. If certain plans had not been submitted within two years, she asked what hope there was that this would be done in time. She asked if the slow movers would be able to make use of grants. Expenditure trends should be improved. There should be more emphasis on this.

Mr M Swart (DA) did not disagree on cuts to grant funding where there was a lack of capacity. He was worried about the water infrastructure grant. He did not see a specific grant for sanitation. This was becoming a problem. Larger municipalities would have to battle to make ends meet for the following five years while the increases were phased in.

Mr Karisho Molusi, Chairperson: Financial, Economic Development and Tourism Committee, Northern Cape Legislature, said that most departments struggled to maintain infrastructure. He asked if there was any help which might be provided. He asked if enough was being allocated for training.

Ms L Yengeni (ANC) said that the predicament was that DORA had to be passed before the expenditure patterns at provincial and municipal levels was known. The information on the websites could be misleading. The Committee had heard from SALGA the previous day, and this body did not support certain grants. She asked how the water infrastructure grant would be implemented in poorer municipalities where there was no water board.

Ms R Mashigo (ANC) was concerned about grants being taken over by DRDLR. There had been some long term planning. She asked for clarity on transitional arrangements. She was happy that the projects would be aligned with the NDP.

Ms Belinda Scott, Chairperson: Finance Committee, KZN Provincial Legislature, had another view on the need for fewer civil servants. She feared that service delivery would decline because of lower budgets. In KZN a cut of about R1 billion was feared, with the Health and Education departments, who already faced budget challenges, facing the brunt of the cuts. There would be long term repercussions.

Mr Brown responded that the requirements on provinces and what happened at local government had to be separated. Money was transferred, but spending patterns differed between provinces. Some provinces had moved quicker to build capacity. Financial pressure might be an option to be considered in order to force provinces to build capacity. Provinces were being given two years to develop their capacity. Provincial treasuries had to play a role in controlling finances. Control could not solely come from Pretoria. He noted the efforts made in KZN, Western Cape and Gauteng, while the Free State, on the other hand, had poor control over provincial finances.

Mr Brown said that a city like Cape Town had to maintain its own indigent register. Maintenance was the easiest way to create employment opportunities. There were 26 000 schools in the country, and many needed maintenance. If the budget was decentralised, schools could tap into the funding and create jobs in the process. The Extended Public Works Programme (EPWP) had not been fully explained to provinces and municipalities.

Mr Kenyon added that road maintenance was a popular use of the EPWP. Procurement of services from general practitioners was a key element of the National Health Insurance (NHI) strategy.

Mr Brown said that when the formula had been updated in the past, it had always been phased in. There had been an attempt to avoid dramatic changes. The budget and the ability of the province to adapt would be assessed first. The stability of the inter-government system was important. Services needed to be provided. Provision had been made for a 16% increase in electricity tariffs, but Eskom had only been given 8%. This would assist with the buffering. Government had to make a choice on water provision. In a number of cases, water funding could not be spent due to a lack of capacity. Support would be given in the implementation of the grant. A component for maintenance had been included. NT was aware of this need.

Mr Brown said that the issue of duplication in grants had been raised. There was a significant urban problem with the rapid growth in urban sprawl and informal settlements. There had to be consideration to use all capacity smartly. NT was discussing transitional arrangements with NRDLR. The NDPG had been moved to inter-governmental relations.

Mr Mazosiwe said that DORA was a comprehensive act. Members had to see how it could boost service delivery. Every year a lot of money was returned to the fiscus. There was a question of how provincial and local government was doing to increase service delivery. Members needed to dissect the situation, and decide what to do going forward. This situation could not persist.

Mr L Ramatlakane (COPE) asked how the processes would be managed. Property rates would now go into a big basket. He asked how this would be handled so that the bills were paid. He asked if municipalities and water boards would have the capacity to use the allocated funding. He asked if the resources would not be diverted.

Mr Sogoni said that the FFC and other bodies provided Parliament with information on the state of affairs in the country. Perhaps more heed should be taken of this advice. Limpopo had been put under administration the previous year. Members knew that there was a lot of under-spending, especially regarding infrastructure.

Mr Brown said that as much information would be provided to Parliament as possible. Full reports on the utilisation of grants and associated risks were presented. It would be prudent for each legislature to determine what the allocation for the payment of property rates was, and whether a proper payment system was in place in their provinces. Changes to the structure of the Department of Water Affairs had caused changes to the grant system, and this was an attempt to restore the previous position.

Ms Fanoe said that health grants in the past had been direct. There was still a direct component which was paid to the provincial department, while an indirect grant would be held at the national department. Three grants had been incorporated into one broader grant. The NHI grant would be direct, but there was a component in the other grant also for NHI. This fell under the indirect grant. There was no duplication, as the components catered for different services. Where the province had a capacity to spend, it could apply for a portion of the indirect grant to be transferred to its control.

Mr Brown added that spending on the different grants was not uniform. The new system would make it easier for funds to be transferred without the need to amend legislation.

Financial and Fiscal Commission commentary
Mr Bongani Khumalo, Acting Chairperson, FFC, welcomed the move to the system as outlined by NT. This would improve planning and spending. Some caution was needed in incentivising and technical support. Slow starting provinces might be the losers. It was important to consolidate grants. The FFC was concerned with the proliferation of small grants. The system became inflexible when it was needed to transfer funds from one grant to another. The process to pass on the administration of housing matters to metros needed to be considered. A report would be submitted to the Minister on 31 March 2013.

Mr Khumalo said that the FFC welcomed the provision of funds for natural disasters. This had been one of their recommendations. The FFC wanted to share the sentiments on the revision to the formula. There had been a relative bias against rural municipalities. The share for the wealthier municipalities was larger than that for the poorer ones. There had been discussion for several years over this problem, and a multi-stakeholder team had discussed the matter. The issue now was ensuring that the municipalities could absorb the capacity. It would the height of fiscal irresponsibility where there was a lack of capacity in the municipalities.

Mr Khumalo said that 97% of resources were allocated were based on demographics. There was a tendency to find people. In some areas there was no infrastructure. Infrastructure did not move with the migrating population. Some consideration was needed on the weighting applied to demographics. The FFC felt that there were strong reasons to review the current approach. They would engage further with their major stakeholders on this issue.

Mr Eddie Rakabe, FCC Researcher, said that the FFC welcomed the lower additions to the baseline. The main issue in provinces was the shifting of the population across provincial borders. There were downward shifts for KZN and the Eastern Cape. While provision was made to cushion this impact, the equitable share formula should be more responsive. In the outer years there was some recovery with a growth rate of 7%. The consolidation of the health infrastructure grant was welcome. This would give provinces the chance to re-prioritise their spending. It was important to note that two of the three conditional grants were less than two years old. Urgent intervention was required to address low spending on NHI pilot projects.

Mr Rakabe said that there was serious underfunding in social development grants. Early childhood development projects and child care projects were being undermined. Local government was growing faster than the other spheres. FFC welcomed the consolidation of grants. FFC recommended that there be better efforts to monitor the spending of the MIG. Regarding the water infrastructure grant, over R2 billion had been deducted from the MIG. There might be unintended overlaps between the different grants.

Mr Rakabe said there was a new formula for the equitable share formula. Several of the FFC's recommendations had been incorporated. Allocations for metros were decreasing compared to those for rural municipalities. However, 56% of municipalities gaining from the local government equitable share had received disclaimers from the Auditor-General (AG). National and provincial departments needed to use existing support mechanisms.

Mr Khumalo noted that government had accepted all the recommendations made by the FFC. There was current discussion with NT. FFC was trying to protect the fiscus. The plan was to submit one big submission of recommendations to Parliament. Parliament should be able to monitor the implementation of recommendations.

Discussion
Mr Sogoni noted that there were no questions from Members. He advised NT that the Committee would be meeting to discuss the state of readiness of the transfer of housing responsibilities the following week.

South African Local Government Association (SALGA) commentary
Mr Loyiso Nkosiyane, SALGA National Municipal Finance Working Group, welcomed the opportunity to present SALGA's inputs against a difficult economic landscape. Most of the applicable issues had been raised. The budget was developmental, supporting growth in municipal service delivery as reflected in the 2011 census, and supported the NDP.

Mr Jonathan Patrick, Specialist: Municipal Finances, SALGA, presented SALGA's mandate. A key area was supporting local government. There had been an engagement with 75 municipalities in October 2012. Leaders had signed pledges committing themselves to sound financial management. Workshops had been held which were attended by 120 municipalities. There had been six provincial workshops. There was a focus on credit control and financial management. There were standing forums for district areas and Chief Financial Officers.

Mr Patrick said that the Select Committee on Appropriations had recommended that SALGA should assist all municipalities in using their infrastructure grants. The reasons for the grants should be explained to municipalities, and business plans put in place. Funds should be spent within the guidelines provided.

Mr Patrick continued that SALGA's response was that they and NT were engaged in a process of clarification. They had helped with the calculation of the new local government equitable share. A proposal for self-funding of pre-1994 infrastructure would be tabled for the following budget.  SALGA participated with the Department of Co-operative Government and Traditional Affairs (COGTA) in provincial workshops to raise awareness on legislative provisions. A brochure had been developed on the 2012 DORA.

Mr Patrick welcomed the R12.1 billion added to local government allocations. This was for anticipated increases in the costs of basic services, access to clean water, urban development and public transport networks, and hosting the African Cup of Nations.

Mr Patrick noted that R3.8 billion had been added for direct transfers and R4.9 billion for indirect transfers for water and electricity provision, bulk water and sanitation infrastructure and skills development. Estimates had to be done on basic expenses for the 2014 budget. A clearer strategy was needed on infrastructure grants. The best placed departments should be identified. Reporting requirements should be streamlined.

Mr Patrick noted that infrastructure grants had been adapted according to 2011 census data. The growth of 3.5% in MIG was minimal, given the demand for roads and the development of micro-enterprises.

Mr Patrick said that SALGA was aware of the fiscal consolidation underpinning the 2013 budget. SALGA would increase its efforts to actively participate in the opportunities provided.  Emphasis would be given to addressing the vertical division. Unfunded mandates should also be addressed.

Mr Nkosiyane had concerns that a portion of the MIG had been taken to support other grants. An intervention was needed where municipalities were under-performing.

Discussion
Mr Mazosiwe said that a number of issues had been raised and discussed already during the meeting.

Ms Mashigo did not understand what was meant by unmandated funding. She asked what NT had done to address these areas. SALGA had been given a role as the custodian of local government. NT should be giving answers based on what SALGA was saying on the under-expenditure on MIG.

Mr Molusi said that African Cup of Nations (AFCON) had already been hosted, but there was provision for a tournament in 2014. Funds for health and medical services were ring-fenced. He asked if any money intended for service delivery had been used in order to host the tournament. Most newspaper reports spoke of additional funds being made available.

Mr Sogoni had heard the co-ordinator of the tournament reporting that AFCON was a success.

Mr Ramatlakane asked about the capacity of municipalities and water boards. He asked how this matter would be addressed.

Mr Sogoni said that the Committee had met with SALGA the previous day and discussed water matters in detail. He understood that there had been some discussion on free basic services.

Mr Nkosiyane said that there would be a proper response on the issues of the water boards.

Mr Sogoni reminded SALGA that Parliament worked on tight schedules.

Mr Patrick said that SALGA would never be satisfied with its members underspending on grants. Close monitoring was needed. A better understanding was needed on the reasons for under-expenditure. He was not sure if funds allocated for service delivery had been diverted to hosting AFCON. On indigent registers, discussion on the local government equitable share (LES) had raised the need for better estimates. This issue had been raised at one of the workshops. The overall pot of money had to be reviewed.

Mr Brown said that the design of LES was seen by all stakeholders as a move in the right direction. At the workshop, there was a question whether the money allocated for free basic services was in fact being spent for this purpose. There was a need for area-based budgeting. This might be implemented in the following two years. All capacity building programmes needed to be assessed. This process had already started. Municipalities would have to be supported. Too much was being spent on consultants, who were milking the system.

Mr Sogoni expressed the need for a workshop with SALGA. This could enlighten Members on the role played by SALGA. The programme on water supplies was a good one. There was still some time before it was due to be implemented. The districts were supposed to be water distribution authorities.

The meeting was adjourned.