Division of Revenue Amendment Bill: Treasury briefing

Meeting report

Division of Revenue Amendment Bill: Treasury briefing
Ms Malijeng Ngqaleni, Deputy Director General (DDG): Intergovernmental Relations, National Treasury (NT) said that the presentation covered the response to issues raised on provincial and local government finances during hearings on the 2018 Medium Term Budget Policy Statement (MTPBS) and an overview of the 2018 Division of Revenue Amendment Bill .

She said that growth in provincial and local allocations were above inflation and slightly faster than growth in national allocations. Funds had been added to provinces to extend free sanitary towels in poor schools and improve school sanitation. Grants for social workers and substance abuse treatment would be incorporated into the provincial equitable share. Informal settlement upgrading would be prioritised through ring-fenced funds in 2019/20, with a view to creating separate grants in future years. Electrification funds for metros would also be incorporated into the Urban Settlements Development Grant (USDG), and a new Integrated Urban Development Grant would be introduced for intermediate cities to enable them to develop more integrated investments, including incentivising the investment of more own revenues.

Regarding the local government equitable share (LGES) formula, the South African Local Government Association (SALGA) had shared their research with the Financial and Fiscal Commission (FCC) on the cost of municipal services. This study had produced a number of interesting results, including highlighting concerns about the high administrative costs of municipalities. Detailed costings of municipal services were notoriously difficult, and there were a lot of assumptions that could be questioned in the study. If the study’s costings were used to allocate basic service allocations in the LGES formula, this would result in a shift of funds away from rural and towards urban municipalities, reversing the impact of reforms to the LGES formula since 2013. It should also be noted that the LGES formula does not use municipal indigent registers as an input. Instead, it uses objective data on household poverty rates from the census.

Local government (LG) asset management data shows low spending on renewal and high levels of unplanned maintenance. SALGA complained that government funded the development of new infrastructure but not maintenance and refurbishment. The LG equitable share includes a provision of 10% of operating costs for maintenance. Most maintenance should be funded from municipal own revenues (and prioritised in municipal budgets). Municipalities must charge tariffs that account for maintenance costs. Grant rules have been changed to allow funds to be used for refurbishment and for road maintenance if certain conditions have been met, but uptake of these conditions had been very low. National Treasury was working with grant managers to improve this.

SALGA was concerned about the continued non-payment of debts owed to municipalities. • Intergovernmental debts were a broader problem, with departments, municipalities, state-owned enterprises (SOEs) and other government entities all having outstanding payments owed to one another. Treasury was committed to changing the culture of non-payment within government and improving consequence management for those that did not meet the 30-day payment requirement in the Public Finance Management Act (PFMA).

With respect to debts owed to municipalities, government was taking specific action to enable the payment of verified debts. One of the reasons that departmental debt to municipalities had not been paid was that many government buildings were not properly registered. Departments could not pay bills for buildings that were not theirs. The 2018 MTBPS had announced a number of reprioritisations, including R100 million (R50m in 2019/20 and R50m in 2020/21) to fund the Department of Public Works (DPW) to resolve the ownership of buildings and register them correctly in the deeds registry. This should finally allow these debts to be paid.

SALGA was also concerned about support for the implementation of Municipal Standard Chart of Accounts (mSCOA), and proposed that small municipalities be exempted from its requirements. It was important to bear in mind the background and purpose of mSCOA. It was a key part of the Local Government Budget and Financial Management Reform package, which had included reforms to accounting, then budget and now systems. mSCOA would deliver extensive benefits to local government, including helping to set cost-reflective tariffs, improved management of finances and enabling better oversight.

There had been extensive engagements on the reform with municipalities, vendors, provincial treasuries and other stakeholders since 2010. mSCOA was the most consulted on financial management reform in the history of LG. The regulation on mSCOA was promulgated on 22 April 2014. Municipalities then had a three-year preparation period to comply with the regulation by 1 July 2017. It was made clear from the beginning that no extension or exemption would be given to any municipalities. We were currently in mSCOA Phase 5, which commenced on 1 April 2017 and focused on the implementation (post 1 July 2017) and institutionalisation of mSCOA. NT and provincial treasuries had taken ownership of mSCOA support and oversight from consultants, as the reform had moved from being a project to ‘business as usual’.

Ms Ngqaleni said 98% of municipalities had successfully submitted their tabled and adopted budget data strings for the 2018/19 Medium Term Revenue Expenditure Framework (MTREF) through mSCOA-compliant systems. Small municipalities were often more successful in implementing the reform, as they had fewer accounts and transactions. The challenges municipalities faced were not generally caused by mSCOA, but rather mSCOA implementation revealed existing problems and incompleteness in the way municipalities had been capturing information.

NT was providing extensive support on the implementation of the reform, including the appointment of eight advisors to support provincial treasuries with implementation, bi-monthly engagements with the mSCOA champions of all provincial treasuries to discuss mSCOA related challenges, agree on solutions and provide training, and regular engagements with municipal system vendors to provide guidance on mSCOA-related technical reporting issues and implementation challenges. It was also offering guidance to municipalities on the alignment of the 2017/18 annual financial statements (AFS) to mSCOA and on how to prepare for the 2017/18 mSCOA audit, in conjunction with the Auditor General of South Africa (AGSA). There was mSCOA training involving 51 trainers from the Chartered Institute of Government Finance, Audit and Risk Officers (CIGFARO), 110 from the SA Revenue Service (SARS), and 28 National Energy Regulator of South Africa (NERSA) officials. In addition, a “frequently asked questions” (FAQ) database had been established to provide a platform for technical and accounting-related mSCOA queries. All of the 323 questions logged from 1 Oct 2017 to 1 Oct 2018 had been addressed

Several stakeholders had raised concern about the pressure on budgets resulting from the public sector wage agreement. Managing the wage bill would be one of the biggest challenges for provincial budgets in the 2019 medium term expenditure framework (MTEF). No reductions were proposed to the provincial equitable share, allowing provinces fiscal space to manage the pressure. Provinces needed to continue to improve the balance between administrative and frontline staff as a way of slowing the growth of the wage bill. Attrition and an ageing staff profile -- and increased retirements -- provide scope for provinces to contain growth in compensation spending.
 
The FFC had raised concerns about the growth of the LG equitable share, which grows by 9.9% in 2019/20, 9.7% in 2020/21 and 8.6% in 2021/22. The growth rate was based on household growth, which StatsSA estimates to be slower than previously published, and the rising cost of services (with uncertainty over the electricity costs).

The FFC had raised several issues on improving the efficiency of spending, particularly for local government and infrastructure, and monitoring and evaluation. National Treasury agreed on the need to review the local government capacity building system. Such a review had been announced in the MTBPS. The MTBPS had also announced the intention to augment the Municipal Financial Recovery Service and the capacity of provincial treasuries to support interventions.

The government agreed with the FFC’s call for improved costing, monitoring and evaluation of infrastructure spending, and was progressively implementing improvements. In the health and education sectors, unit cost benchmarks were being used and provincial road maintenance funding was now allocated mainly based on the extent of their road network. Each sector department was expected to improve its capacity to monitor the performance of the grants they administer. The government was strengthening infrastructure planning, introducing one infrastructure delivery management system for the whole of government, and establishing a project preparation facility that brings together expertise from government and the private sector to deploy technical experts to support the development of investment-ready projects. NT was also improving the transparency of reporting on infrastructure projects, in line with Parliament’s request to receive quarterly updates on progress. It agreed with the FFC’s emphasis on improving the impact achieved through existing baselines, as an appropriate response to the constrained fiscal environment.

Overview of Division of Revenue Amendment Bill (DoRAB) Process

Ms Ngqaleni said that the 2018 Division of Revenue Act (DoRA) had been considered and approved by the legislatures at the beginning of this year and signed by the President on 1 June 2018 (it was Act 1 of 2018). The DoRA made equitable share and conditional grant allocations to provinces and municipalities and sets out the rules for those grants. The Division of Revenue Amendment Bill (DoRAB) makes amendments to the DoRA. Section 12(4) of Money Bills Amendment Procedure and Related Matters Act requires that the Minister of Finance table a DoRAB with the revised fiscal framework, if the adjustments budget effects changes to the DoRA. This presentation sets out all of the changes to provincial and municipal allocations in the 2018 DoRAB.  She showed how the changes were shown in the schedules.

Together with the tabling of the Division of Revenue Amendment Bill, National Treasury also submits to Parliament proposed changes to gazetted conditional grant frameworks and allocations. Section 16(2) of the DoRA 2018 requires National Treasury to consult Parliament on any proposed changes to a conditional grant framework for the purpose of correcting an error or omission. Parliament had been requested to consider and approve corrections to the conditional grant frameworks (outlined on the subsequent presentation slides headed “Framework correction”). Once the Bill was enacted, National Treasury would also gazette the amended allocation per municipality outlined in annexures 4-6 of the Bill, and the changes per province for indirect grants set out in annexures 1 and 2 of the Bill.

Drought Relief

Mr Steven Kenyon, Director: Local Government and Budget Framework, National Treasury, gave a brief background pertaining to drought relief, and said that since 2014, South Africa had been gripped by a devastating drought.  A national disaster had been declared in April 2018 but had lapsed in June 2018. Government’s response had been led by the Inter-Ministerial Task Team (IMTT) on water scarcity and service delivery. Nationwide dam storage levels had been at 71% in October 2018. The drought had affected most parts of SA over the past three years.

Extensive funding for drought relief was allocated through the grants system prior to the 2018/19 financial year. This included provision for livestock feed for drought affected farmers in the Northern Cape and Western Cape, and the provision of emergency water augmentation projects for municipalities. R1.56 billion had been allocated through conditional grants through reprioritisations and additional allocations.

A summary of amounts allocated per province through conditional grants for drought relief prior to 2018/19 indicated that the Eastern Cape had received 19.5%, KwaZulu-Natal 41.0% and the Western Cape 28.9%. A further R1.59 billion of municipal and provincial own funds were also reprioritised towards drought response over this period.

Mr Kenyon explained how allocations for 2018/19 had been determined. The 2018 Budget Speech had announced that a provisional allocation of R6 billion had been set aside in 2018/19 for several purposes, including drought relief and to augment public infrastructure investment. National Treasury had run a process to allocate funds that included two windows for applications -- in June and August 2018. Applications had been assessed with the National Disaster Management Centre. Sector departments, provinces and municipalities had been called for further inputs. Section 6(2)(b) of the Appropriation Act, 2018, enabled the expenditure announced in the Budget Speech to spent before tabling an Adjustments Appropriation Bill. Direct allocations to provinces and municipalities were gazetted on 4 October. 

He gave a summary of criteria used to evaluate applications. These were:
 
The ability of the affected sectors to spend and account for funds;
Existing baselines in relevant programmes;
Prioritising projects that would be completed and deliver water in the time available to spend these funds;
The need to implement interim or stopgap measures before sustainable solutions were implemented and the extent to which the applicants were affected by the drought;
The prioritisation of the projects that improve long-term drought resilience;
Cost for potential water yield;
Municipalities with substantial own revenues were expected to co-fund projects;
Funding should be broadly proportional to the extent of the drought, after accounting for population differences.

A total of R3.4 billion in drought response funding had been allocated to all three spheres of government. R1.98 billion had been added to direct conditional grants for drought relief. These amounts were gazetted on 4 October 2018 as drought relief allocated to provinces:

R266.5 million for the Comprehensive Agricultural Support Programme (CASP) grant for feed and water for livestock in six drought affected provinces;
R200 million for the Land Care Programme grant for activities to improve the resilience of agricultural land to drought. This included the removal of alien vegetation, fencing, firebreaks and stock water systems;
R200 million for the Provincial Disaster Relief grant to provinces. The original allocation for this grant in the 2018 Budget had been used up. Additional funds would replenish the grant so that it could be used to fund relief for any further disasters that may occur.

Drought relief allocated to municipalities was made up of direct and indirect conditional grants.

There were two direct conditional grants. There was R288.1 million for the Water Services Infrastructure Grant to fund a variety of water supply augmentation projects, including drilling and equipping boreholes to access groundwater and implementing water conservation measures where the reduction of water losses would improve the sustainability of supply. The other was R1.03 billion for the Municipal Disaster Recovery Grant to be transferred to Cape Town, Nelson Mandela Bay and Mangaung, to subsidise the costs of water augmentation projects, including groundwater development and water conservation. These cities were also expected to contribute funds from their own revenue base.

There were also two indirect conditional grants. There was R1.01 billion for the indirect Water Services Infrastructure Grant for water supply augmentation projects, including drilling and equipping boreholes and implementing water conservation, and R6 million for the indirect Regional Bulk Infrastructure Grant to accelerate a water supply augmentation project in Ndlambe Local Municipality.

The grant frameworks for the following grants were amended to include conditions attached to the approval of drought relief funding:

Comprehensive Agricultural Support Programme Grant;
Land Care Programme Grant;
Municipal Disaster Recovery Grant;
Water Services Infrastructure Grant;
Regional Bulk Infrastructure Grant.

The conditions included transferring officers to monitor progress on the implementation and to report monthly to the National Joint Drought Coordinating Committee of the IMTT Technical Committee of Drought and Water Scarcity. One month after the receipt of the allocations, receiving officers had to provide a detailed breakdown of how the funds would be used to the transferring officer and National Treasury, and report on the expenditure in line with the requirements of DoRA and the gazetted grant framework

Disaster Recovery Allocations

Mr Kenyon said that in the immediate aftermath of a disaster, funds are released from the provincial and municipal disaster relief grants to fund immediate needs. After this, the National Disaster Management Centre leads a process to assess and verify the damage to infrastructure. Based on this assessment, funds are then allocated in the next budget or adjustment budget for disaster recovery.

In the 2018 DORAB, disaster recovery funds were allocated for the repair of damage caused by storms in KwaZulu-Natal, and the fires in the Western Cape. R16.3 million was allocated to KwaZulu-Natal through a new Provincial Disaster Recovery Grant for the repair of provincial buildings managed by the Departments of Social Development (DSD) and Cooperative Governance and Traditional Affairs (COGTA). R175.8 million had been added to the Education Infrastructure Grant for the repair of 87 schools in KwaZulu-Natal and 22 schools in the Western Cape. R199.5 million was added to the Health Facility Revitalisation Grant for the repair of 14 hospitals in KwaZulu-Natal. R1.3 million was added to the CASP grant to repair damage to 15 farms in the Western Cape. R100.1 million was added to the Human Settlements Development Grant to repair 3 280 subsidised houses damaged in KwaZulu-Natal, and three houses in the Western Cape, and R143.3 million was added to the Municipal Disaster Recovery Grant -- R138.7 million for municipalities in KwaZulu-Natal, and R4.6 million for Bitou LM in the Western Cape.
 
Conditions were attached to ring-fence funds added for disaster recovery in the following conditional grant frameworks: the Education Infrastructure Grant, the Human Settlements Development Grant, the Health Facility Revitalisation Grant and the Provincial Disaster Recovery Grant. The provincial disaster recovery grant framework would be gazetted for 2018/19. This grant did not form part of the Division of Revenue Act, 2018, but had now been allocated in response to the need to repair provincial buildings damaged by heavy storms and floods in KwaZulu-Natal.

Budget Facility for Infrastructure Allocations

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury said that  government had previously announced the creation of a Budget Facility for Infrastructure (BFI) that would put proposed large infrastructure projects through a rigorous assessment process before recommending funding. The BFI process included engagement with the relevant sector stakeholders and the Presidential Infrastructure Coordinating Commission (PICC).

 Two projects that had been recommended through this process for potential long-term funding were allocated initial funding in the 2018 DoRAB. R166 million was added to the National Health Insurance (NHI) Indirect Grant: (Health Facility Revitalisation Component) for the procurement of medical equipment as well as the planning and design of Limpopo’s proposed new academic hospital. R33 million was added to the Public Transport Network Grant for the City of Cape Town, to begin detailed design on a new phase of the MyCiti public transport network approved through the Budget Facility for Infrastructure.

Conditions attached to the approval of the Budget Facility for Infrastructure funds were added to the National Health Insurance Indirect Grant (Health Facility Revitalisation Component) and the Public Transport Network Grant. The conditions for this funding stipulate that the additional funds could be used only for the purposes of BFI-approved projects, and should there be cost variations of more than 10% on each of these projects, the National Treasury must be informed within 30 days

Reprioritisations in NHI Indirect Grant

To address the critical staff shortages, R350 million was reprioritised within the NHI indirect grant to pay for hiring additional healthcare professionals. These funds were allocated through a new human resource capacitation component. The national Department of Health would oversee the procurement process necessary to ensure the right healthcare specialists were appointed on to the public health platform. R150 million was reprioritised from the Health Facility Revitilisation Component of this grant for the procurement of beds and linen to improve the functionality of health facilities. These funds would be allocated in a new beds and laundry services component.
 
To deal with emergency maintenance needs in the Northern Cape, R42 million was converted from the NHI Indirect Grant: Health Facility Revitilisation Component to the direct Health Facility Revitilisation Grant. To facilitate the smooth transition of the Human Papilloma Virus (HPV) vaccine programme to provinces, the NHI Indirect Grant: HPV Component was reintroduced, with an allocation of R30 million.
Provinces already receive a direct grant worth R200 million

Three new grant components under the NHI Indirect Grant would be gazetted for 2018/19. These grant components did not form part of the Division of Revenue Act, 2018:

Human Papillomavirus Vaccine Component;
Beds and laundry services Component;
Human Resource Capacitation Component.

Ms Fanoe described other adjustments to conditional grants affecting the provinces.

R1.3 million that was committed but not spent in 2017/18, was rolled-over for the Learners with Profound Intellectual Disabilities grant for the procurement of learner teacher support material (LTSM) for the Eastern Cape and Northern Cape. R18.4 million was rolled-over for the Substance Abuse Treatment grant to enable the completion of the construction of treatment facilities in the Northern Cape and Free State. R800 million was added to the indirect School Infrastructure Backlogs Grant for the completion of school infrastructure projects, where plans have already been approved and are ready for implementation.

Corrections to the provincial government framework were applied to the Health Facility Revitalisation Grant. The ‘process for 2019/20 approval of the implementation plans’ section of this framework was corrected to refer to the submission of the infrastructure programme management plans for 2019/20, instead of 2018/19. The due date for the final submission of business plans for 2019/20 was corrected from 29 March 2018 to 29 March 2019. The maths, science and technology grant was corrected to rectify the omission of the 2016/17 audited financial outcomes, while the learners with profound intellectual disabilities grant was corrected to allow the permanent appointment of specialists that form itinerant teams/.

She concluded by saying that the indirect Municipal Systems Improvement Grant included allocations to complete the integration of municipalities merged in 2016. This was previously funded through the Municipal Demarcation Transition grant, which ended in 2017/18.  R23.2 million was converted from indirect to direct allocations so that funds could be paid directly to the municipalities that had incurred these costs

Discussion
Mr D Maynier (DA) said that his question had been raised during the MTBPS. The South African government usually caved in to the demands of trade unions. As a result, there was an above inflation public sector wage bill, which could cost over R30 billion over the next three years and R6.9 billion this year. This was a significant amount of money. The opportunity cost of that money was about 37 000 more nurses or 60 000 more teachers. At the end of the day, this agreement had been reached by the national bargaining council. The provinces were not part of that agreement. It struck him that according to Section 35 of the PFMA that amounted to an unfunded mandate. Section 35 reads, “Draft national legislation that assigns an additional function or power to, or imposes any other obligation on, a provincial government, must, in a memorandum that must be introduced in Parliament with that legislation, give a projection of the financial implications of that function, power or obligation to the province.” He said that he had had a look at the bill, and there did not seem to be any such memorandum. His question to National Treasury was whether they agreed that this amounted to an unfunded mandate? If they did agree, why had such a memorandum never been included as part of this bill.

Mr A Shaik Emam (IFP) said some of the matters they had highlighted were matters which were prevalent over a period of time, such as the 30 day payments. He asked what they believed they would do differently this time around to ensure that people complied. He knew that they had spoken about consequence management.

The other question was about the urban settlements development grant (USDG). In some areas, it had not even been used. He wanted their comment regarding this and what they believed to be the solution.
His concern was about the eight advisors. He asked whether was it not the case that whenever people were failing, there was a tendency to provide oversight perpetually, duplicating costs. As a result, people who were supposed to be performing were not performing. He asked if they thought it was sustainable to continue in this manner.

Lastly, he wanted to know who monitored and evaluated the Treasury itself. The reason he was asking was that if one looked at the designated financial management system, billions of rands were lost. What was needed to monitor them as well?

A delegate said that over the past 10 years, the Committee had heard about interdepartmental debt which did not get paid. This was the case once again. It did not seem to be improving. His question was that R100 million would be allocated to the DPW to resolve property ownership issues. If they did that, they would probably end up with a bigger rates bill to pay to municipalities. It should not be the DPW doing it, but some other entity without a vested interest, such as National Treasury. If one was to allocate all this money, he presumed that some kind of modus operandi had been established as to how the properties would be identified. Would there be another commission set up and public hearings requested? How exactly was the money going to be spent?

Mr M Shackleton (DA) said that efficiency of spending was important in government and across the nation. Infrastructure was strongly linked to service delivery. As a result, he welcomed the implementation of systems such as the infrastructure delivery management system, and that Parliament would receive quarterly updates. He was also looking at the conditional grant, paying attention to big projects such as the ones in Limpopo and Mpumalanga. There needed to be a focus on efficient spending. It had been said that if a department overspent by 10% on a project, they must report this within six days. He wanted to find out more about this. 10% of R1 billion was a R100 million, which was a massive amount as an example. He felt that it was a good starting point. Perhaps it was a good start to look at how government had been spending. Going forward, there could be ways to look at curbing spending further. Perhaps the 30 days could be reduced. Maybe they could elaborate further. Were there any stricter sanctions imposed?

Mr T Motlashuping (ANC, North West) said that year in and year out, National Treasury reported the same story and he was getting concerned about this, funds were still being allocated areas where there was irregular, unauthorised and wasteful expenditure. They spoke about consequence management, but to date, the same culprits received the same allocation and nothing was done about it. He also welcomed the R800 million added to the school infrastructure backlogs grant. The NCOP had conducted national oversight in the Eastern Cape and found a number of mud schools. There was a challenge of sanitation to the extent that one child had died. Did this R800 million prioritise mud schools and the provision of sanitation?

He also wanted to address the item of the government having embarked on Section 100 in the North West Province. He was unsure about the R350 million allocated for hospitals, as an example. Bophelong Hospital, in particular, had recovered in terms of staff, professionals etc due this allocation. He spoke about the North West being under intervention. Part of National Treasury’s responsibility was to monitor and support both local and provincial government. If for example, a government went for four years and National Treasury did not pick up that there were challenges, the only option was a Section 100 intervention to correct things, and they were still involved. Would the Committee have confidence that they would be able to address the challenges again through the allocation of funds and services delivered, particularly in the North West Province? What intervention mechanisms had National Treasury come up with after allocating these funds? Did they look for value for money, etc?

Mr M Chabangu (EFF, Free State) urged Parliament to do away with Jojo tanks with immediate effect, because in the Free State they were used as a scheme to enrich certain people, whereas communities were suffering. He also advised that boreholes should be a priority, because they could avert the current water challenges.

Mr O Terblanche (DA, Western Cape) said that about 10 or 11 years ago, the DPW had appointed consultants to sort out their asset registers for them. He was at a loss as to what had happened to the money that was allocated at the time, because they were still singing from the same hymn book. He had serious reservations about this, and clarity was needed as to why they had not been able to sort out their fixed asset register.

He wondered whether National Treasury had tried to understand what impact the wage bill increases which the Provinces had to meet, would have on service delivery. For example, entry level posts in the police force would be affected. It did not make sense to him, and he wanted an explanation from the Western Cape specifically about how it would impact them.

The Member representing Mpumalanga welcomed the provision of the National Health Insurance grant and the R850 million which had been allocated to different provinces. They also wanted to ask National Treasury about their approach regarding municipalities which owed Eskom large sums of money as far as intervening to assist such municipalities. Regarding the Provincial Disaster Recovery grant, funds had been allocated to KZN and the Western Cape, but he knew that his province had experienced storms which had destroyed government infrastructure and housing. He asked for this grant to be extended to the Mpumalanga Province. He sought clarity about whether the School Infrastructure Grant applied to all provinces or specific provinces.

Another Member commented that funds going to provinces included grants for social workers and treatment centres. She wondered why there were not grants for other department’s workers, such as teachers and the police, who were working very hard. Regarding drought relief funds allocated in the 2018 adjustment budget, the Northern Cape budget had been reduced although it was one of the biggest provinces and had also experienced a drought.

A Member representing the Free State welcomed the upgrading of the informal settlements allocation. What also needed to be taken into consideration was that there could not be a formal settlement which was not included in the spatial planning of the municipality. This could also lead to irregular expenditure. Both the municipality and the Department of Human Settlements needed to work on this.

The main concern with mSCOA and MFMA outcomes, was that municipalities had their own financial systems which they were using. They were advised by National Treasury that some of the systems used created problems. In terms of the budget, they were mSCOA compliant, but now the majority, specifically in the Free State, had budget deficits. Even if the municipality was mSCOA compliant, if the budget was decreased it created problems.

She said that the Department of Water and Sanitation did not help. They were sitting with projects in the Free State where they would come in and money was spent, but it was the same work. Money could not continually be allocated to a Department which was known not to have capacity. This amounted to unnecessarily planning for irregular expenditure.

Mr A McLoughlin (DA) said he noted the new grants, but the percentage for local government remained the same. How did they keep increasing the grants, but the percentage remained the same? The presentation had stated that “a new Integrated Urban Development Grant would be introduced for intermediate cities to enable them to develop more integrated investments (including incentivising the investment of more own revenues)”. He said this sounded like giving them money to invest their money. It was unclear to him. Recently he had gone to a summit at which local governments were being encouraged to borrow as much as possible. There was already a lot of government debt. Could the municipalities not be encouraged to generate their own money, instead of borrowing it from somewhere else?

The presentation had also stated that the LGES formula did not use municipal indigent registers as an input. Instead, it used objective data on household poverty rates from the Census. This seemed like a risky business to him, because there were many municipalities which had a very small indigents’ register, but they would get a large amount of money. They would not know what to do with this money. What would happen it? The temptation would be to use it for operational expenditure.

They had been told some time ago that one needed about 8% of the budget to be allocated to maintenance. Then it was changed to be 8% of the value of the assets. The presentation had stated that “the LG equitable share includes a provision of 10% of operating costs for maintenance”. In the next bullet point ,it read, “most maintenance should be funded from municipal own revenues (and prioritised in municipal budgets). Municipalities must charge tariffs that account for maintenance costs”. What was National Treasury doing to encourage municipalities to budget for themselves and to recover money themselves?

The Chairperson said that when replying, Ms Ngqaleni also needed to refer to the Public Audit Amendment Bill and the assistance that would give, especially to Treasury and the Auditor General, with regard to monitoring the spending of money.

National Treasury’s response

Ms Ngqaleni referred to the wage bill, and said she did not agree with unfunded mandates. The fact that NT had not allocated additional was an acknowledgment by government, given the economy, that it would not be able to increase its borrowing for any other resources to address that challenge. There were means to manage risk in lieu of what government could afford.
The failure to meet the 30-day deadline for the payment of invoices was a government problem, and there needed to be accountability. HODs had to be held accountable in terms of complying with the law. The effort was needed not only from National Treasury, but from all departments. It started at the top.

Under-spending was a concern, when departments were not spending the grants where they were meant to be spent. What was needed was proper project planning, which had proper project pipelines. Putting more effort into project preparation would help to ensure that they were getting value for money. Efforts were being made to ring-fence allocations for informal settlement upgrading. There was a need to properly address the issue of informal settlements, and also to leverage civil society resources.

Regarding the challenges posed by mSCOA, Members needed to be aware that there was a Department of Monitoring and Evaluation. This was purely their job. When it came to the monitoring of government, this was their arena. National Treasury was not excluded from the work which they were doing, or should be doing. National Treasury also wanted to highlight a point about the budget facility structure for the month of May. The budget facility for infrastructure was a new development.

It was important to note that the school infrastructure backlog grant was an indirect grant. It specifically targeted certain projects. It was classified under the accelerated school delivery infrastructure initiative (ASIDI). The conditional grant framework’s purpose was to eradicate all inappropriate school infrastructure. It specifically targeted mud schools in order to address a very specific historical backlog.

mSCOA- 8 Advisers appointed, officials not doing what they’re supposed to be doing.

With regards to the financial burden that mSCOA brought to municipalities. National Treasury said that municipalities always had financial systems which they had to pay for. That part had never changed. The tender was meant to bring the cost of the financial systems down. What had been found was that some municipalities were not complying -- not because of the financial system, but because they were not doing what they were supposed to be doing, such as cleaning and capturing their data correctly. There were also a lot of municipalities which avoided some systems, for some or other reason. This was a matter they were looking at. They had secured funding for each of the four financial systems, and this would ensure that all systems were working as they were supposed to.

The Chairperson said that when people were trained, they needed to be given an assignment which they had to pass before they could go back to their provinces. The Committee had been advocating this for many years. They had heard the same story repeatedly. He urged that this be implemented once and for all.

Mr Kenyon said the drought relief reprioritisation indicated on page 17 the presentation referred to the previous year. The funding for the current year was detailed on page 21. The Free State had quite substantial funding (R252.5 m). Water tanks were not funded through this allocation at all. They were aware of those provinces where most of the funding for water augmentation went towards borehole development. The drought response had revealed a lot of procurement challenges in some provinces

Ms Ngqaleni referred to the 10% of the equitable share which was set aside for maintenance, and said this portion was actually very small considering the broader budget for local government. They also needed to use some of their own resources for maintenance. The 8% was a benchmark which they should provide for.

Municipalities had to provide services to those who could pay as well as those who could not. The equitable share was to cater for those who could not pay.  For those who could pay, costs of services should be recouped through tariffs, to make provision for maintenance.

Ms Ngqaleni said she did not know which hospital in North West province would be prioritised.  National Treasury did pick up when there were problems. However, what needed to be understood was that accountability to respond still rested with the relevant sphere of government, and when they were unable to do so, there was the provision to use Section 100. 

She said calls for intervention to assist local government to collect revenue seemed to be linked to the whole issue of non-payment for services. Part of the problem was local governments’ operational inefficiency National Treasury was pooling resources with COGTA and targeting those municipalities for assistance, but it was also incumbent upon municipalities to do the right thing. This was where Section 139 also came to the fore. Treasury was not providing for bailouts.

There had been numerous efforts to resolve the challenges surrounding the fixed asset register, the most recent of which had revealed a large number of cases where the deeds were not properly recorded. They had identified the problem, but the project had been unable to find a resolution. With regards to the Department of Public Works having a vested interest in the process, he said the responsibility for paying the municipal services bills would fall upon DPW. They were the custodian of government buildings, and would have to make room in their budgets to make those monthly payments once the challenges were resolved.

Ms Ngqaleni said that in intermediate cities like Stellenbosch and Rustenburg, where there was a mix of affluent households and businesses, there was potential for a mix of grant funding and revenues which municipalities could generate themselves. The borrowing which Treasury was encouraging municipalities to do was against their future own revenue. Unlike national government, municipalities were only allowed to borrow long-term for capital investment, which was a safer and more responsible framework.

There used to be rules which made funding available for the poor in indigent areas. What NT wanted to see was a blending of grants and municipal revenue in order to develop more integrated projects where possible, and also for large projects such as sewage treatment plants. The rules for the grants had shifted from a project by project basis towards an overall infrastructure budget. They had also allowed for the influx of private sector funding which was needed.

NT was working with the Department of Human Settlements around the rules for spatial plans. This would ensure that informal settlement upgrading was aligned. In the framework which they had tabled with the bill in February, one could see the output of that work.

NT was aware of the damage in Mpumalanga. The recovery funding usually came in later, because it took time for an assessment to be done. Relief funding could be released much faster. The national pool of funds for relief and disasters was used only if a province had exhausted its own funding. In a lot of cases, provinces responded using their own funds.

With regard to the indigent register, the challenge was that some municipalities applied robust criteria, while others did not. It was not only about allocation. The question that needed to be asked was what to do when there was a situation where half were receiving free basic services. What needed to be done to ensure that the relevant households were actually benefiting?

Further discussion

The Chairperson asked how local government accounted to National Treasury for every cent that was allocated in the budget through the equitable share. This needed to be part of the reply.

The co-Chairperson asked about the wage bill proposal to the provinces, and the reprioritisation of the budget. The Committee had heard about trapped municipalities, which were not in a position to pay some of their staff members. What response was NT considering concerning this?

Mr Motlashuping said that in the North West, there was a challenge around scholar transport. There were children who would not be able to attend school if they had to pay certain outstanding amounts. Would there be any provision for this matter?

Mr Maynier said that NT had claimed that the provinces had agreed to the public sector wage bill. He asked for clarity about which body had agreed and when that response had been made. He asked if NT could furnish the Committee with a distribution of the public sector wage bill for this year across the nine provinces.

The Chairperson said part of Mr Maynier’s question was which body or structure had confirmed the public sector wage bill. He said that the role of the Budget Council must be referred to.

A Free State delegate said that as and when municipalities needed to account, they were saying that mSCOA was an impediment to them. She was not questioning what NT was doing, but was raising it so that they could be aware of it. The fundamental point was that as long as NT was saying that municipalities were moving towards mSCOA compliance, but the budgets were decreasing, this created problems. Lastly, her understanding about the initial registration processes was that it was the responsibility of the municipality. In the Free State, she hoped that NT was aware of a municipality which had outsourced its responsibility for registration. She was raising this point because it might come up when National Treasury went to the Free State.

The Chairperson referred to municipalities which were owing money to Eskom, and said he thought that Treasury should have come up with interventions to assist them because they were struggling to come out of that debt.

Mr Maynier said he wanted to make a comment. He thought it was unfair to blame National Treasury for the complete financial meltdown in provinces or municipalities. He felt that the Committee should be clear on this.

The Chairperson asked how the Committee could do robust oversight.

NT’s response

Ms Ngqaleni referred to the wage settlements, and said that in terms of the bargaining council, it was a settlement which they would not have agreed with. They knew the costs of the settlement. She would not say government agreed to it, but felt that government had had no choice.

She said that once municipalities were told to come with a grant, it became problematic. NT felt that there needed to be a process informed by interventions in terms of Section 129, and would be made to work. Part of what they were trying to strengthen was the application of Section 129. The Act did provide for legal proceedings if one had gone into the process of intervention.

The Chairperson said that the point of intervention was that it must be sustainable after the intervention. The provincial Department of Education in Limpopo was still under Section 18 of the PFMA. During the intervention, they had been under Section 100(b). This exercise had taken place for three years.

The Chairperson said Select Committee members of the Appropriations Committee were now preparing for their briefings in their respective provinces on 14 and 15 November. In terms of Section 118 of the Constitution, public hearings had to held in those provinces regardless of the information which would be sent to those provinces.

The meeting was adjourned.