Division of Revenue Bill: FFC & SALGA briefing

Meeting report

Financial and Fiscal Commission Briefing on Appropriations on the 2018 Division of Revenue Bill
Prof Daniel Plaaitjies, FFC Chairman and Mr Eddie Rakabe, FFC Researcher, shared the briefing. The Committee was provided with an overview and general assessment of the Division of Revenue (DoR) Bill 2018.

Clauses 8(4)(a) and 8(4)(b)
The Clauses were revised and the FFC welcomed the adjustments as they were in line with FFC recommendations made in its 2018/19 Annual Submission.

Clauses 30(2)(a)(i) and 30(2)(d)
The FFC supported the changes as alignment of funding and function was key for efficient delivery of services.

Clause 21(7)
The Clause was revised and the FFC welcomed the new development as it would assist the Department of Human Settlements in dealing with unexpected housing requirements.

Clause 27(4)(b)
The revision of the clause was supported as the FFC believed that an annual review of the Infrastructure Delivery Management System (IDMS) document would allow provinces to improve their planning and budgeting process and would take into account changes in infrastructure needs and asset maintenance requirements. 

Clause 27(5) 
A new sub-clause was added to the clause. The FFC welcomed the introduction of the Integrated Urban Development Grant (IUDG) as it was in line with past recommendations made by the FFC to consolidate local government conditional grants.

The briefing continued with detail on the fiscal framework. The Division of Revenue, amongst the three spheres, was characterised by muted growth increase over the 2018 Medium Term Expenditure Framework (MTEF). Conditional grant allocations to provinces and municipalities would bear the brunt of the need to cut and reprioritise spending in order to stabilise government debt. Provincial conditional grants were reduced significantly over the 2018 MTEF. Major reductions were with respect to the human settlements, education and health sectors. Local government conditional grant baselines would be reduced by a total of R13.9 billion over the MTEF. The largest cuts would be experienced by four grants i.e. the Municipal Infrastructure Grant (MIG), Public Transport Network Grant, the Integrated National Electrification Programme (INEP) Grant and the Urban Settlements Development Grant (USDG). The FFC however proposed that in the future a more rigorous analysis of the performance of each grant be done before cuts were made.
National Treasury however had responded to submissions made on appropriations and on budgets. The rest of the departments had not. Some of the departments in question were Human Settlements, Transport, Health, Education, Social Development and Cooperative Governance and Traditional Affairs. The FFC would be raising the issue in writing with respective Ministers of those departments, with the Committee, as well as with the powers that be in Parliament.

Discussion
The Chairperson said that it was good that the FFC had made recommendations to departments. The recommendations made needed to be forwarded to the Committee so that it could place pressure on the departments to respond to them. She added that Members looked pleased with the presentation made.

Ms M Manana (ANC) asked why recommendations that the FFC had made to National Treasury had not been responded to. She felt that National Treasury had to respond to the recommendations made.
 Referring to the presentation she asked why the issue of the National Health Insurance (NHI) was only mentioned as a matter for noting but not for deeper discussion.

The Chairperson clarified that National Treasury had responded to the recommendations - it was other departments that had not. The FFC had stated that National Treasury had to improve access to larger markets. She asked the FFC to provide an example of where municipalities were able to access private capital. The FFC had proposed that in the future a vigorous analysis of grants needed to be done before they were cut. The same applied to household grants. How would it be done? Why could it not be done in the next budget cycle? 

Prof Plaaitjies wished to reaffirm that National Treasury had responded to the FFC’s recommendations. The response was based on how there was a direct impact on the fiscal framework and also on total appropriations. The FFC had not received responses from government line departments – this was concerning. Departments simply did not read the FFC’s inputs on what happened in each sector. The responses sat in line functions. On the vigorous analysis required on conditional grants he explained that local government was often expected to fund areas that were a national priority. It could also become a budget policy matter going forward. The nature of the cuts related to how the grants performed.

Ms D Senokoanyane (ANC) pointed out that the FFC had said that health sector grants were drastically reduced but the Member did not see a drastic reduction. On the presentation she noted that the HIV&AIDS Grant was reduced due to under spending. The FFC had recommended that the root cause for the underperformance needed to be found instead of reducing the Grant. She felt that budget cuts and constraints applied to everyone. If people under performed, how could funding just continue?

The Chairperson said that perhaps National Treasury could speak to the reduction in health grants. She pointed out that the NHI was a new programme which was very demanding. Sufficient budget was needed for implementation. The NHI was at the implementation stage. The budgetary principle was that budgets were reduced when there was under expenditure. However human settlement grants were reduced regardless of good performance. Had the budgetary principle changed?

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, replied that National Treasury had responded to the Division of Revenue. The presentation that National Treasury had done the previous day would make for interesting reading to Members. Municipal borrowing was the issue. National Treasury had released a Borrowing Bulletin which contained a great deal of information. It would be provided to the Committee. National Treasury supported viable municipalities. A distinction needed to be made between short term and long term borrowing. There was a need to understand value spent. She added that section 71 reports were also on National Treasury’s website. Human settlement grants were not only reduced because of under spending. It could also be due to clarity of policy that was needed or due to the value of the spending. Perhaps the grant money was not well spent or there were uncertainties in policy. There might also be a need to relook at the housing policy, where houses were built and where huge municipal infrastructure investment was needed. A great deal of policy work was needed. On education infrastructure spending, the question was whether new schools should be built or should existing schools be invested in. There was such a thing as having too many schools. There were instances where schools were built but there were no teachers and no equipment. On NHI, cuts were linked to a cut in health infrastructure expenditure in the grant.

Ms Dumebi Ubogu, Director: Provincial Policy and Planning, National Treasury, said that the cut in the Title Deeds Grant was to improve performance of the housing market on publicly provided housing.     

Mr Krisk Kumar, FFC Commissioner, largely agreed with National Treasury’s comments. He explained that long term borrowing was for capital expenditure. Short term borrowed funds had to be repaid within the financial year. The Borrowing Bulletin had some interesting statistics. Total borrowings by municipalities sat at R66 billion - R55 billion of the total was borrowing by metros. Why were metros borrowing and not the smaller municipalities? It had to be ensured that smaller municipalities had access. He cautioned against municipalities borrowing and making debt. Municipalities should not borrow recklessly. He agreed with National Treasury that if there was a move away from grant funding for municipalities then there would be a huge impact.

Dr Ramos Mabugu, FFC Head of Research, added that conditional grants were being used as an instrument in different circumstances rather than for the purpose for which they were intended. Conditional grants were being used to support consolidation. He felt that there was a need to rethink this. Conditional grants were intended for spill over effects and for national priorities. Monitoring and evaluation on the impact of grants had to be done. At times conditional grants could do more harm than good. On why the NHI issue was only for noting and not for discussion, this was because there was a great deal of ongoing work behind the scenes. The FFC did not wish to mislead the Committee. The FFC felt it more prudent to alert the Committee that the NHI was a huge issue. Behind the scenes things were happening.

Prof Plaaitjies explained that the FFC had started to engage with the Minister of Health on the NHI Fund. There were implications that had to be considered such as contracting, appointing service providers etc. There were also consequences around the Division of Revenue. The Minister of Health identified human resources, supply chain management, infrastructure, i.e. maintenance and finance, as important issues. These might not be directly linked to the NHI but were indirectly linked. It would have a collateral impact on decentralised services in provinces. On funding there were tax considerations too. The NHI was a huge project. The FFC would have to have a discussion with its partners over these issues. The NHI would be on the FFC’s radar screen for the next five years.

Mr A McLaughlin (DA) was concerned about the total municipal borrowing figure of R66 billion – this would be made worse by calls to encourage municipalities to borrow. He accepted that the figure was not part of national debt but part of the municipal budget. Was there not an effort to pass the buck so to say? The problem came in where the man on the street was expected to bear the brunt of paying back the borrowed money. A government grant was a guarantee for a municipality to borrow money.

Mr Kumar explained that the idea was to maximise borrowing in order for municipalities to be able to deal with backlogs. The balance however should be gotten right. Municipalities needed to be fiscally prudent. Unfortunately municipalities were not maximising fiscal effort. All monies owed to municipalities should be collected. Efficiency had to be improved. Borrowing was an essential tool to ensure that services could be rolled out. Capital expenditure had to be funded by own resources, if not then funds could be borrowed.

Mr N Gcwabaza (ANC) noted that during the briefing no mention was made of who guaranteed the borrowing by municipalities. It would be concerning if municipal borrowing was encouraged when it could add to SA’s national debt. If the monitoring mechanism was for long term projects, what guarantee was there that municipalities would use the funds for long term projects? Municipalities had in the past used grant funds to pay salaries. Was there a plan to balance borrowings on the strength of improving revenue of municipalities? There should be improvement in revenue collection. The concern was that borrowings might lead to rates, water and electricity tariffs increasing. The crux of the matter was a balancing act. He observed that the human settlement grants were performing well at 96%. The monitoring thereof was however questionable. The Reconstruction and Development Plan (RDP) Project had overspent by far. Was there perhaps a lack of RDP policy? Were funds spent where it should be spent and on people who deserved it?  Spending for the sake of spending was not good. How and where funds were spent should be looked at. There was a need to tighten the RDP policy so that needy families could be targeted. There were cases where young persons from affluent families applied for RDP houses and got them.

Mr Kumar responded that municipalities were not given guarantees. Municipalities borrowed on their own balance sheet. It was appropriate for municipalities to borrow. Municipalities however tend to under borrow. Only 19% of capital expenditure was from borrowing. He pointed out that human settlements had come a long way to where it was at present. Human settlements restricted municipalities and had norms in place. If municipalities did not stick to the norms then they had to find the funds themselves. There was strict monitoring in metros. There was also provincial and national oversight on the monitoring of borrowing. The Auditor-General of SA (AGSA) also performed audits.

The Chairperson asked the FFC why the merger between the Education Infrastructure (EI) Grant and the Integrated Community Development (ICD) Grant did not happened. Was the failure related to process? The FFC was also asked to explain the disparity in performance of the ICD Grant and the EI Grant.  

Mr Rakabe said that the ICD Grant and the EI Grant merger had not happened. The reason was that there were projects that had not been completed. If projects were finalised then the merger could happen. He continued that the ICD and EI Programme were skewed in favour of the EI Grant. The FFC supported the merger of these two grants.

Ms Fanoe added that infrastructure spending by provinces had improved compared to what it was in the past. In order to assist provinces to put infrastructure in place, national government stepped in to assist with the ICD Grant Programme. It was to deal with projects of the past i.e. historical backlogs of school infrastructure. The EI Grant was for new projects. She pointed out that the ICD Grant was not at the same level in all provinces. Where the majority of mergers happened, post infrastructure backlogs could be handled. The majority of the backlogs were in the Eastern Cape province - mergers of programmes were still to take place in this province. The province had said that it wished for the National Department of Basic Education to complete the ICD Programme.

Prof Plaaitjies stated that going forward there was a need to interlink financial performance and management with service performance and management. Where there was national/provincial concurrency it should be checked whether instruments used were appropriate. The FFC supported the NHI but there were a number of issues that had to be resolved as it would impact upon the intergovernmental fiscal system. There were also constitutional law issues around what funding was intended for. Other issues on the NHI were the capabilities of the Minister of Health regarding human resource management, supply chain management and also the maintenance of infrastructure. Ambulances for instance was a state responsibility to deliver emergency services, however there provinces that placed ambulances in private hands. He noted that the FFC’s recommendations had policy implications, financial implications and service delivery implications for departments.

South African Local Government Association Briefing on 2018 Division of Revenue Bill                                                            
Mr James Matsie, Director Municipal Finance, SALGA, began by providing an overview of the implications of the 2018 Budget Speech, the impact of the macroeconomic climate on local government, the impact of infrastructure cuts as well as the increase in Value Added Tax (VAT). SALGA welcomed the clauses as amended in the Division of Revenue Bill 2018. SALGA also provided the Committee with a breakdown of its comments in support of recommendations made by the FFC. SALGA supported the creation of the new Emergency Housing Grant in the Division of Revenue Bill 2018 - it would address the need to rapidly provide temporary housing in cases of disasters. SALGA however wished to point out that the Emergency Housing Grant was not designed to address other situations covered by the Housing Code’s Emergency Housing Programme, namely situations where evictees had to be provided with alternative accommodation. Municipalities faced a critical funding gap in this respect. Consequently, SALGA would be undertaking research to develop recommendations on the most appropriate funding mechanisms for temporary housing for those rendered homeless by an eviction. SALGA also welcomed the planned review of spending on urban informal settlement upgrades but advised that there was a need to avoid creating a new conditional grant for this purpose, given that reversing the proliferation of grants, which local government had to contend with, was one of the key agreed principles of the Local Government Infrastructure Grant Review underway. On the Urban Settlements Development Grant, where there was under expenditure and underperformance, the Division of Revenue Act allowed a department to shift funds between municipalities, however SALGA cautioned that National Treasury and the department had to ensure strict adherence to section 18 requirements when doing these shifts. SALGA had furthermore observed that there were funding gaps in waste management. There was a need for a differentiated approach to the funding of waste infrastructure and specialist equipment. There also seemed to be a funding gap for municipalities on environmental performance.   

Discussion
Mr Gcwabaza asked whether SALGA was aware of the statement made by the Deputy Minister of Police some weeks back on the issue of 80% of residential buildings and business accommodation in Johannesburg being taken over by foreign nationals. There was 80% occupation by foreign nationals. There were similar situations in other metros. He raised the issue on the back of the housing grant issue that SALGA had spoken to. Did SALGA look into the issue? Local government was beginning not to spend its grants on local residents who were the ones paying rates, water and electricity bills. It was a national issue that had to be looked at. The Committee had previously raised the issue. There was a great deal of businesses that were not paying tax. Nor were people paying for water and electricity. He added that in city centres people were adding floors to buildings without taking municipal regulations into consideration. This placed huge strain on the coffers of municipalities. He wished to emphasise that he was in no way raising the issue against any group of individuals. The issue was that government spending and municipal budgets were being affected.  There was a stress on infrastructure and illegal activities were taking place. There was talk about increasing grants but issues like these were not being dealt with.

Mr Matsie noted that he did not have a mandate to speak on the matter of foreigners illegally occupying buildings and having an impact on services with SA citizens having to foot the bill, but noted the concern. On businesses not paying for services, SALGA assisted municipalities to improve revenue collection. Businesses needed to be registered with municipalities. On the matter of unregulated building expansions there was a need for municipalities to strengthen their by-laws.   

The Chairperson asked SALGA what inputs it had made at forums to try to get the local government allocation to be increased. SALGA made the point that local government received the smallest allocation. If municipalities were to review internal management strategies, coupled with this should be SALGA overseeing municipalities.

Mr Matsie said that SALGA was aware of the fiscal framework of municipalities. Municipalities could borrow more. The most contentious issue for SALGA was the alignment of powers and functions of spheres of government. In this instance, local government in relation to funding allocated. A vertical review of spheres of government was needed. On the internal management structures of municipalities, there was monitoring of what municipalities did. SALGA had a dedicated programme for red zone municipalities and challenges of those municipalities were being analysed. The SALGA identified gaps in assistance that municipalities were getting. A review was done every five years.  On billing, SALGA developed tools for credible tariff models. Not all municipalities had cost effective tariffs. Municipalities needed to prioritise internal efficiencies. SALGA wished to explore the expansion of section 10 of the Municipal Systems Act to coordinate all state employees. SALGA did support the Office of the Chief Procurement Officer. Credible procurement processes was supported by SALGA.   

Ms Senokoanyane pointed out that SALGA stated that infrastructure grant cuts seemed to be skewed in favour of social services at the expense of economic services. She felt that the entire budget was skewed in this way. There was a need to address the issue of social services. Funds must be found to assist the neediest. She noted that on the Emergency Housing Grant no mention was made of evictions. She said that she saw many evictions in her area. She was concerned that if municipalities were expected to carry it out through the use of funds from the equitable share. She asked SALGA to speak to what it had presented about waste management having a backlog of 30% on the provision of services.

Mr Matsie, on infrastructure grant cuts and its social impact, said that social problems had to be prioritised. Cuts in grants would impact programmes municipalities had in place. He was aware that some of the grants were cut due to under spending. The point on Emergency Housing Grants was noted. More work was being done. Evictions were also being looked at. Waste management targets were set in terms of Outcome 9 and the deadline was nearing but there was still a 30% backlog to meet targets. On infrastructure and equipment the key point was own revenue. If a municipality was very indigent and had a low revenue base, SALGA calculated the cost to provide a waste management service was R8.5 billion. Even the cost of waste collection trucks was high. These trucks could not be bought using the Municipal Infrastructure Grant (MIG). A differentiated approach to the MIG was needed to allow these types of municipalities to procure trucks.

The Chairperson reiterated the point was that SALGA participated in forums. What proposals had SALGA made in relation to getting the 9.2% allocated to local government increased?

Mr Matsie responded that SALGA believed there needed to be a review of powers and functions. This review was supposed to be done by the Department of Cooperative Governance and Traditional Affairs (COGTA). SALGA was waiting for the process to happen. Vertical transfers were aligned to powers and functions as well. SALGA was waiting on the COGTA to finalise powers and functions.

Mr Kumar stated that the FFC had worked on the issue around municipalities being able to better finance their operations. On the adequacy of the 9.2% to local government, the FFC felt it to be inadequate. It was a matter that should be looked at. Powers and functions had to be reviewed. The FFC researched the issue of unfunded mandates of municipalities. There was a gap. Municipalities were expected to provide services which were unfunded mandates.

The Chairperson asked the FFC to share its report with the Committee.

Ms Fanoe said that everyone wished for local government to function properly. Focussing on local government’s 9% allocation did not add to the discussion. She pointed out that local government had received increases over time compared to other spheres of government. A proper share for local government should not be the discussion point. One needed to rather look at what the challenges were. For instance, municipalities should improve on its revenue collection. The issue should be about getting local government to function properly. A sit down was required to identify the real issues. Challenges at national level also needed to be identified. There should be collaboration and agreement.

Mr Steven Kenyon, Director: Local Government and Budget Framework, National Treasury, added that MIG rules did not allow for the purchase of refuse removal vehicles. National Treasury was engaging with the Department of Environmental Affairs as well as with COGTA. Trucks did not form part of infrastructure. Trucks were large capital investments. Many municipalities contracted refuse removal vehicles through service providers. In such an instance it was not regarded as capital but as an expense. National Treasury had asked the Department of Environmental Affairs to work on policy guidance on the matter. If it was allowed that trucks could be purchased with MIG funds then a transversal tender was needed.

Prof Plaaitjies, on debts owed to municipalities, said that citizens were always the soft targets i.e. services were cut. The main culprits not paying municipal bills were businesses and government departments. In 2017 a total of R126 billion was owed to municipalities. These funds could have been used for service delivery capacity. He noted that he raised the issue with the SALGA leadership that harder decisions needed to be taken against government departments and corporates etc. Political decision making was wanting. SALGA and municipalities needed to make definitive decisions. He noted that Eskom was installing pay-as-you-go meters in order to recoup funds.

The Chairperson summarised the issues before the Committee. There was firstly the lack of response by government departments to FFC recommendations. The Committee would communicate all issues raised to the House. The impact of budget cuts also had to be considered. The issue of municipal debt had to be resolved. From the briefings there was support for the DoR Bill 2018 but budget cuts had to be monitored. When the need arose there should be an option to respond to it. There was also support towards the idea of municipalities borrowing funds but this too had to be monitored. SALGA had complained about local government’s 9.2% allocation but it had to be remembered that capacity was lacking at local government level. The FFC should look into how the budget of local government could be improved and how functions could be better allocated.

The meeting was adjourned.