Division of Revenue Bill & Second Adjustments Appropriation (2022/23 financial year) Bill: National Treasury briefing

Meeting report

Briefing by NT on the Division of Revenue Bill [B2-2023]

2023 Division of Revenue

Mr Bongani Daka, Senior Economist: Intergovernmental Policy and Planning, National Treasury (NT), outlined the 2023 division of revenue over the medium term. The national share of revenue was expected to increase at an annual average rate of 0.9%, transfers to provinces at 2.8% (with conditional grants to grow slightly faster than the equitable share), and transfers to local government at 7.4%, mainly as a result of the higher-than-inflation growth of the equitable share. He explained that although the tax base was concentrated in urban areas, rural areas would receive more per capita/per household. The transfers per household to the most rural municipalities were more than twice as large as those to metropolitan municipalities. More rural provinces similarly would receive higher allocation per capita than urban provinces.

Provincial government allocations

Mr Daka said that transfers to provinces would account for 97% of provincial revenue in 2023/24. Technical updates had been made to the provincial equitable share formula. There have also been changes to the provincial conditional grants. Treasury requested that Parliament allow it to amend some of the health conditional grants to allow for funds to be used to respond to measles outbreaks in  several provinces.

(Please see slides 7-12 of the presentation)

Local government allocations

A Treasury official said that transfers to local government accounted for 10% of the nationally raised revenue. Overall direct allocations to local government would grow by annual average of 5.9% over the 2022/26 medium-term expenditure framework (MTEF) period, while the local government equitable share would grow at 8.1%. Some changes had been made to the local government allocations.

(Please see slides 14-18 of the presentation)

Division of Revenue Bill Clauses and Schedules

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, NT, went through the substantive changes to the Bill. These included a provision requiring organs of state to notify NT, the relevant provincial treasury, the Department of Cooperative Governance and Traditional Affairs and the Auditor-General of a decision to institute judicial proceedings against another organ of state within ten days.

(Please see slides 20-22 of the presentation)

Briefing by NT on the Second Adjustments Appropriation (2022/23 Financial Year) Bill [B4-2023]

Dr Mampho Modise, Deputy Director-General (DDG): Public Finance, NT, outlined revisions to 2022/23 non-interest expenditure since the 2022 Budget. This included adjustments to the appropriations for South African Airways (R1bn), the South African Post Office (R2.4bn), the public service wage increase (R14.6bn), the political parties fund (R300m) and the Land Bank (R5bn). She discussed the conditions attached to each of the adjustments.

(Please see slides 6-12 of the presentation)

Discussion

The Chairperson said that as the custodian of public finances, NT needed to share some responsibility for the performance of entities such as the Post Office. It could not shift all the blame onto the shareholder departments. In the end, It was Treasury that came and asked the Committee to approve a bailout. She welcomed the stringent conditions attached to the bailouts and the consequences, but there should also be corrective measures going forward. She welcomed the increase in the allocation for the compensation of izinduna (headmen and headwomen) in Kwazulu-Natal but asked why additional funds (R631m) would be allocated to KwaZulu-Natal only, given that these traditional leaders were present in other provinces too. She asked whether the Municipal Emergency Housing Grant would be transferred to the Department of Human Settlements (DHS) as part of its overall allocation or whether DHS would have to reprioritise its existing budget. She observed that medical claims absorbed huge amounts. Was there any way to address this?

Mr M Moletsane (EFF, Free State) observed that the South African Post Office (SAPO) had been allocated a cumulative amount of over R7.3bn between 2016/17 and 2018/19 but had not emerged from its financial weakness. Has consequence management been implemented? Somebody must be able to account for what had been done with all the money. He asked what criteria had been used to decide on the two provinces that would be allocated funds to build bridges. Was the process of shifting the early childhood development (ECD) portfolio from the Department of Social Development (DSD) to the Department of Basic Education (DBE) complete? If not, when would it be? NT should strengthen local government institutions to be able to handle the funds allocated to them and the provincial sphere of government should be done away with. The present model was outdated and it gave the smallest share to local government, which directly served communities.

Mr D Ryder (DA, Gauteng) said that although transfers to provinces made up 97% of their revenue, they were permitted to raise funds through other mechanisms such as fines, fees and tolls. However, they often seemed to be reluctant to use these kinds of mechanisms because of the political cost. Were provinces doing enough to raise their own income? Clearly, many local governments lacked the capacity or political will to collect revenue from their residents. As a result, their revenue collection was poor and they were unable to meet their commitments to Eskom, Water Boards and even employees. Local governments were quick to call for assistance and ask for a review of the equitable share formula but were not doing what they should be to generate their own income. What was NT doing to ensure that local municipalities were capacitated and understood the need to collect revenue? Municipalities that collected none of their own revenue should be penalised or have conditions attached to their equitable share to ensure that they spent on service delivery. Emfuleni Municipality, for example, was well known for not collecting revenue, while at the same time, its politicians would be taking a fully-paid two-night trip to discuss the integrated development plan. What was NT doing to bring this kind of spending to account? A lot has been said about the data that informed NT’s decisions. Had NT received any response from Statistics South Africa? He asked how much of the compensation budget was going towards refunding employees versus paying employees. How much of the budget went to service delivery? How did arrears come about in terms of the compensation requirements? He recalled that President Cyril Ramaphosa had previously indicated that there would be an infrastructure-led economic recovery plan when he launched the Economic Reconstruction and Recovery Plan (ERRP), but infrastructure seemed to be the poor cousin in this Budget. There was a massive deficit in infrastructure spending and too much focus on employee benefits.

The budget facility for infrastructure (BFI) agreement to spend money on Coega Special Economic Zone (Coega SEZ) was quite interesting. Was it the only SEZ? He asked for more information on this. He also asked for more information on the transport budget. What about the e-tolls in Gauteng? How much money would be set aside for this? An amount of R6.8bn was mentioned but he was sure that there was more money hidden away elsewhere. How would Gauteng be assisted in this regard? He was concerned that moving the housing emergency grant to the national DHS would slow down its response time and questioned the logic of this change. He asked for a phone number that a public representative could use to get emergency housing for people in immediate need. He acknowledged that big changes to budgets had been made in response to electricity and water price increases but the presentation did not mention fuel price increases. Fuel prices had increased by 14.8% in the last 12 months and had doubled over the last ten years. How was fuel factored into the equitable share formula? In which provinces would the Single Integrated Ticketing System be piloted or would it be rolled out across the country? He recalled that the previous Minister of Finance had made promises about limits to increases in public sector wages that had since been ignored. Section 30(2) of the Public Finance Management Act (PFMA) seemed to permit ministers to promise just about anything they wanted to in adjustment budgets. He also expressed disappointment in the bailouts for South African Airways (SAA), SAPO and the Land Bank. Their expenditure needs could have been predicted long ago. He asked for more information on the source of funds for the adjustments. It could either be from the higher revenue collection by the South African Revenue Service (SARS) or from under-expenditure of the Social Relief of Distress (SRD) grant through the DSD. What did it mean that DSD was unable to spend its SRD grant budget? Were the conditions for the SRD grant realistic, given the needs of the people on the ground? He questioned the need to budget more money for political party funding while, at the same time, government was struggling to find money to fulfil basic responsibilities.

Mr F Du Toit (FF+, North West) said that it was clear from the engagements with the Land Bank that it would continue pursuing its objective even while its business plan did not seem financially sustainable. When did NT expect the Land Bank to need the next bailout? Would bailouts become a regular event? He asked whether the R1.6bn increase to the ECD Grant would be used for the remuneration of caregivers. He observed that established farmers had also lost a lot during recent floods and fires and asked whether there was any allocation for the support of commercial farmers and farmers in general, other than the upcoming farmers. He asked for a detailed breakdown of all the grants and allocations to all municipalities per province. This would empower councillors to conduct oversight more efficiently.

Mr Y Carrim (ANC, KZN) observed that there was no Master Plan for the ERRP. This was required to see how the Budget connected with economic policy. How the Budget linked to the National Development Plan (NDP) was also unclear. The National Planning Commission should work together with Treasury and communities and this cooperation should be reflected in the division of revenue. He welcomed the conditions on the use of the adjusted appropriations but thought there should be more conditions on how the money was used, particularly in the case of Eskom. He was concerned that the recent Eskom Bill was moving towards privatisation without properly considering the plethora of forms of public-private partnership that might ensure profitability while simultaneously contributing to development. Complete privatisation should be a last resort. Transnet was in the same position. Conditions on the special appropriations shouldn’t require a complete ideological turnaround.

Ms A Randall (DA, Gauteng Legislature) found it strange that NT had not included anything about an Information and Communications Technology (ICT) conditional grant. There were significant opportunities in this sector. She was aware that Gauteng was struggling to roll out phase two of its broadband network project because of budget constraints. In general, there were a lot of regulatory barriers that continued to cripple the current and future growth potential of the digital economy. Why had there never been consideration of an ICT grant? She suggested that NT include this in a future budget and pilot projects in Gauteng to help residents, townships and small, medium and micro enterprises (SMMEs). This will help to boost the digital economy. She asked what the status of the Vaal River SEZ was.

Mr M Ndabeni (ANC, Eastern Cape Legislature) asked whether any study had been conducted before making the decision to move the Emergency Housing Grant to the DHS. How would DHS, based in Pretoria, be able to meet emergency housing needs in the Eastern Cape, for instance? Why were the funds being taken so far away from where they were needed? What would the requirements to access the funds be? The demand for emergency housing was huge, especially in the Eastern Cape. Had this been considered before making the decision? Was an assessment of the backlog made? What was the view of NT on the historic backlog of infrastructure in some provinces? This included health and education infrastructure. He was asked why the equitable share formula was used to distribute the funds for public sector wage increases, rather than just looking at the number of government employees per province. He asked how much money had been allocated to the Umzimvubu Water Project in the Eastern Cape and called for a committee to be established to guide the project alongside NT. He was concerned that SAPO was being directed to sell non-core assets. Would these assets not be needed in the future? The government should not just hand its assets over to the private sector. The same could be said about SAA. He acknowledged that bringing in private sector equity partners differed from selling state-owned enterprises (SOEs). He wanted to understand NT’s point of view on SOEs in relation to government as a developmental state.

Mr Z Mkiva (ANC, Eastern Cape) asked whether the NT could set aside some resources so that roads, especially in rural areas, could be upgraded to tar roads. This was a long outstanding issue. Rural communities should not be seen as secondary. The same rapid infrastructure upgrade approach taken with electrification should be taken with roads, with specific attention given to strategic access roads. The people at the periphery have to be brought into the centre of the economy. Gravel roads were cheap to build but expensive to maintain, so tarring would result in savings in the long term. The same principle should be applied to running water. It was important to have some kind of strategy to ensure the rapid roll-out of water services and sanitation for rural communities. The same could also be said for ICT connectivity. NT must be deliberate in its investments. There must be an investment into fibre internet across rural communities so that public facilities like schools, clinics, social development and other social services could reap the benefits of connectivity. This issue must be prioritised. He also said that the oceans economy in the Eastern Cape remained underdeveloped. It should not be relegated to the background. The time had come to strike a balance between the wealth on the land and the wealth in the oceans. Developing the ocean economy would create jobs and help alleviate poverty.

The Chairperson asked what the specific reasons were that the City of Cape Town (CoCT) revisited its implementation plan for using the Public Transport Network Grant (PTNG). The Moloto Rail Corridor project should also not be forgotten about. She asked whether there had been consequence management for the cities that had reportedly underspent their PTNGs. Non-collection of revenue by municipalities was another issue that had been raised. At the same time, the services they were providing to the people were a nightmare. Before NT allocated money, the Committee had to be convinced that there was a need and that the municipalities would be delivering quality services. The Committee had to be convinced that the money being spent was worth it.

Responses

Dr Modise drew attention to clause 6 of the 2022/23 Appropriation Bill which empowered Parliament to modify the budget. Over the past couple of years, equivalent clauses had been used to deal with spending that had not yet been finalised. She said that NT needed to find a balance between assisting an entity that was struggling and ensuring that it safeguarded the country’s finances. She was pleased that Parliament welcomed the strict conditions around adjusted appropriations. SAPO had to indicate what it had done to deal with the financial misconduct between 1 April 2019 and the third quarter of this fiscal year. Unfortunately, NT could not fire the board of an entity. A Treasury official could only propose to the Minister, Cabinet and Parliament that if an entity could meet the specified conditions then it should not be allowed to receive the money. This was the only way a treasury official could enforce discipline, and it would also create problems if used. It would worsen the situation if people’s salaries were not paid. She explained that in the past, NT just gave the money to SAPO and told it to implement its turnaround plan. There were no discussions about milestones and monies were transferred all at once rather than in tranches. This time, tranches of money would only be transferred when milestones were achieved. This would help NT to avoid the situation where it came back to Parliament saying that SAPO had been unable to implement its turnaround plan. She explained that SAPO’s non-core assets were those assets that were not being used and were incurring unnecessary costs. SAPO was currently not using those assets. This was the first time that NT had pushed SOEs to sell non-core assets. There was no point in keeping these assets if they were not financially self-sustainable. SAPO would need help from the fiscus but it also had to rise above its problems and not simply depend on the fiscus. Disposing of non-core assets was part of the strategy the state had to consider. It would not harm the turnaround strategy but enhance it. She suggested that the Committee invite SAPO to come and present its turnaround plan. This would enable the Committee to see what the R2.4bn would be used for. She explained that the Second Adjustments Appropriation Bill differed from the normal appropriation bill insofar as it was trying to resolve the funding pressures of entities where there were still revenue overruns for 2022/23. The Committee had required NT to fund the SAPO and it was now looking to try and resolve the problems instead of bringing them into the next year. The funding for the adjustments were a combination of revenue overruns and underspending in various departments. She said more information on the SRD Grant could be provided when NT briefed the Committee on the Appropriations Act. This Grant had been introduced during COVID-19 and there hadn’t been time to put efficiency measures in place. The criterion for accessing the Grant was unemployment, but provision had not been made for people in the informal sector or working part-time. Unfortunately, there were also always people who would take advantage of the system and NT had not anticipated some of the ways people would do this, such as using multiple bank accounts. There was an opportunity to realise significant savings by linking individuals to multiple bank accounts. During COVID-19, there had not been enough time to do income tests, but there was enough time now, and administrative teams had been dispatched to determine deserving recipients, that is, people below the food poverty line when all their income sources are added up. The problem was not the inability of the DSD to fund or disburse the Grant, it was to ensure that all and only deserving recipients received it. She said there would be a dedicated Eskom Bill and a team from NT would be present to answer questions on it when it was tabled. There would be an allocation for the Umzimvubu Dam. When the Appropriations Bill was tabled, the exact numbers for each year and for whatever purpose could be discussed. She said that there was a technical discussion around the e-tolls to try and find a way to implement a political decision made by the Minister in the medium-term budget policy statement (MTBPS), where he announced that the Gauteng provincial government would pay 30% (R43bn) of the e-toll debt, and the national government would pay the remainder. The province would then decide whether to continue raising revenue for road maintenance through e-tolls. Gauteng had also indicated that it would reimburse people for e-tolls already paid, despite the administrative difficulties this would entail, and it would use its own revenue to do so.

Ms Ogalaletseng Gaarekwe, Chief Director: Provincial Budget Analysis, NT, said the issue of remuneration of headmen and headwomen went back to 2011 when the Independent Commission on Remuneration for Public Office Bearers indicated that salaries should be paid to these traditional officials in rural provinces. The President signed a proclamation in 2014 after much deliberation. Regarding the proclamation, provinces were to back-pay the headmen and headwomen from April 2013. KwaZulu-Natal was the only province that did not immediately implement the proclamation. The province eventually started paying the salaries in 2016 and it approached the national government for assistance, as it had the highest number of headmen and headwomen. She said that there was no specific funding for medico-legal claims. The Department of Health did reprioritise their own budgets and from time to time and provincial treasuries assisted with additional funding. She drew attention to a recent court judgment ruling that provinces do not have to pay a lump sum. This would create a precedent that they would pay out periodically. The process of shifting ECD to the DSD to DBE was already complete. She pointed out that COVID-19 affected municipalities’ revenue collection, especially from motor vehicle licenses. There was not much growth in revenue from motor vehicle licenses however, which might be due to most rental car fleets being registered in the Eastern Cape or Gauteng because it was cheaper, but NT wanted the fees to be standardised across the country. While motor vehicle licenses were doing well, other revenue streams were obviously not collecting to their maximum potential. She said Coega SEZ was the only SEZ that had applied for BFI funding, and that there was also a dedicated SEZ fund administered by the Department of Trade, Industry and Competition (DTIC). She could not say exactly what the ECD programme funding would be used for. The national government had identified health infrastructure backlogs in different provinces and NT was involved in discussions of the way forward.

Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, NT, said NT frequently issued regulations and circulars to guide municipalities on using funds. It also developed guidelines. Extensive training has been done for municipalities in a number of areas. As indicated in the presentation, a total of R164bn had been allocated to local government. There had been a lot of critique that the revenue share of local government was small. However, this was not the entire budget of local government. If one looked at the overall budget it came to about R530bn. This was something that had to be understood when debating local government underfunding. NT did not deny that some municipalities did not have sufficient revenue. The 2023 division of revenue was particularly redistributive insofar as it gave proportionally more to rural municipalities. While local government did fall under the Department of Cooperative Governance and Traditional Affairs (COGTA), financial management across all three spheres of government was NT’s constitutional mandate. Many municipalities lived beyond their means because of a cruel budgeting system that depended on bills issued to the communities for services rendered. This problem needed to be addressed decisively. More than 100 municipalities were facing this problem. NT issued two budget circulars annually, giving extensive guidance to municipalities on how they should spend their money and what would happen to unspent funds. NT has also introduced revenue management programmes. Extensive research and development work had been done on cost-reflective tariffs and municipalities were being trained on how to formulate such tariffs. It would soon issue a transversal tender which would help smaller municipalities. There was also a financial management improvement programme through which advisors from NT were placed in local and provincial municipalities. Each year, NT issued specific allocation letters to each and every municipality to summarise their equitable shares and all the transfers that the municipalities would receive. This information was also published on NT’s website. This process would be completed soon and shared with the Committee.

Ms Fanoe said that the decision to shift the Emergency Housing Grant to the national department was based on the lessons learned from the KwaZulu-Natal floods. Firstly, there were often delays in the provision of temporary housing units by provinces and municipalities. Secondly, the cost per unit was quite excessive. Central procurement was intended to bring down the cost and make delivery faster. The DHS would still be working with the provincial departments. Municipalities in need of emergency housing would alert the national department. She said that census data would become available in June or July. This data was expected to dramatically impact the allocations for both provinces and municipalities. When the census data was received, it was phased in over three years, or longer if needed, to ensure that provinces and municipalities were able to adjust to their new allocations. NT would inform the Committee of adjustments made on the basis of the census data. If everything went well, the data would be incorporated into the 2024 budget but if there were delays it would be incorporated into the 2025 budget. When discussing the budget share for compensation of employees, it should be remembered that provinces were more personnel-intensive than municipalities and that different provinces had different personnel requirements. There was a good balance between compensation of employees and other expenditure in provinces. She also pointed out that compensation of employees was directly linked to service delivery. Educators, doctors and nurses, for example, played a very critical role in service delivery. It was important to look at the type of employees that were appointed. There had not been large reductions to infrastructure allocations and Treasury would even look to increase infrastructure budgets in municipalities where there was good spending. She explained that NT had had to do some calculations on behalf of the National Energy Regulator of South Africa (NERSA) this year, which had led to delays in finalising allocations for electricity. Fuel costs were part of Treasury’s calculations. It worked with the relevant departments on this on an annual basis. Nevertheless, more work could be done in this area. A task team was working on determining these kinds of costs more precisely. She said that disaster funding was targeted at social infrastructure only, not economic infrastructure, and as such commercial farmers were not provided for. She suggested that the Committee invite the National Disaster Management Centre to explain how the system was constructed. She said there were policies in place to target particular provinces for connectivity in schools in rural areas. NT was looking at the infrastructure grant and to see whether it could be more rural-focused. She explained that budgets for compensation of employees were allocated to provinces and calculated through the provincial equitable share formula over the MTEF, while in-year increases were funded through provinces’ personnel budgets. The reason that the equitable share formula was used over the MTEF was to prevent a perverse incentive for provinces to over-staff. As far as the Eastern Cape and the coastline were concerned, a project was underway to develop the coastal line. This fell under the ambit of COGTA.

Mr Daka said that over time, funding for rural bridges would be provided to all provinces. To date, funding has been given to provinces that have come up with projects. In 2023/24, the first year of the MTEF, Gauteng, the Northern Cape and the Western Cape were the only provinces that would not get the funding. This was because these provinces had not planned projects that could be funded. The funding made available for 2023/24 had to be reduced because there was unallocated money left over. He hoped the three provinces would submit projects for the 2024/25 budget.

Ms Malijeng Ngqaleni, DDG: Intergovernmental Relations, NT, said that at the moment, provinces depended on national funding for 97% of their budgets because the services they delivered did not lead to recovery of cost, whereas municipalities delivered services that should actually be paid for. If there were people who do not pay for services then people would have to be taxed so that water, electricity and similar basic services could be funded. Roads were a much bigger issue. At the moment, even strategic roads were not being kept in good condition. This was the reason for the allocation of R6.8bn for the road infrastructure grant. The grant was allocated according to need. It was not always just about the money but sometimes about having an implementation plan and the capacity to be able to deliver. NT has tried to make a contribution through various programmes to address the issue of infrastructure delivery even though it is essentially outside its mandate. The BFI actually enabled provinces, municipalities and other government entities to bring forward proposals. They needed a clear plan, readiness and the capacity to deliver. This is what happened with the Coega SEZ. Some plans had to be aligned with the capacity. All kinds of things were being done to address infrastructure deficits, even besides the BFI-approved funding. For example, provinces and local government could now borrow against conditional grants to accelerate infrastructure development. She said there had been issues with delivering some programmes, resulting in backlogs. Other times, infrastructure was delivered that ended up being under-utilised. This was now occurring in the Eastern Cape in education, for example. The expansion of ICT infrastructure was a mandate of the Department of Communications and Digital Technology (DCDT), and its plans had to be aligned with provincial plans.

Ms Zethu Ncube, DDG: Local Government and Budget Framework, NT, said the Single Integrated Ticketing System was a pilot project. It was funded through a reprioritisation of unspent PTNG funds. The system was needed by the ten cities that benefited from PTNGs. It would be piloted in three cities, including Cape Town and George. She said as far as the City of Cape Town was concerned, the additions made in the 2023 budget were actually an offset of reductions presented to this Committee in the last two budgets. She said there would not be one reason why the City of Cape Town had to revise its implementation plan. It was important to highlight that this was a ten-year project approved in 2018. There was an expectation that things would change within these ten years. There had been a change in the technical team and in the executive. There had been local government elections and a change in political leadership. There were a variety of issues that affected the implementation of the project. There might be further changes in the next budget, but the changes would be aligned with the budget.

Follow-up discussion

Mr Ryder pointed out that the adjusted appropriation for the Land Bank and the political parties fund had not been mentioned in the Minister’s budget speech. The Minister had however said that he was fulfilling a promise that his predecessor had made concerning the Land Bank. He asked for clarity on when exactly this commitment had been made. He also said that the possibility of increasing the budget for the SRD grant should be looked into if it was not currently enough to provide for all the people who desperately needed it.

Dr Modise said that the adjusted appropriation for the political parties fund was being done through section 6 of the Appropriations Act, as were the SAPO and the SAA adjustments. She didn’t think there had been a promise concerning the Land Bank but it was mentioned in the 2022 budget, specifically that the contingency reserve was there to deal with the Land Bank. This allowed Treasury to use section 6 of the Appropriations Act.

Closing remarks

The Chairperson was disappointed that SAA was still receiving bailouts. She proposed that the Committee engage with SOEs, NT and the relevant Portfolio Committees to discuss the bailouts. This would allow the Committee to get better clarity on the issues and assist the Portfolio Committees in oversight.

Members supported the Chairperson’s proposal.

The meeting was adjourned.