Medium-Term Budget Policy Statement (MTBPS): hearings with stakeholders: FFC, COGTA & SALGA

Meeting report

The submission covered the following aspects:
1 The overall fiscal framework and fiscal consolidation:
▪ global economy and potential risks for South African economy
▪ summary of the fiscal austerity (consolidation) measures and job creation
▪ state debt projections
▪ loan debt and revenue
▪ economic growth, social services and infrastructure
▪ financing of new imperatives: Millennium Development Goals and Health
2 Spending priorities of national government for the next three years
3 Proposed medium term expenditure framework and division of revenue between government spheres
4 Proposed substantial adjustments to conditional grants allocations to provinces and local government
5 Review of actual spending by national and provincial government: 1 April to 30 September 2010.

Mr Ramos Mabugu, FFC Research and Recommendations Director, said that fiscal austerity (consolidation) measures on in their own could be harmful to economic growth. A floating exchange rate regime and accommodative monetary stance of the government would need to facilitate the process of fiscal consolidation. There was a need to increase productivity and the ICT sector had the potential to boost economic growth during the consolidation process. State debt costs and foreign loan debt were projected to increase over the medium-term. The country needed a faster and more inclusive economic growth strategy. Challenges for growth included the very high spending on social services, low labour absorption capacity and high unemployment which was partly due to skills mismatch. On infrastructure funding and capacity to spend, there needed to be an urgent redress especially with provincial and local government conditional grants. There also needed to be an accelerated implementation of approved infrastructural projects and an increase on maintenance and rehabilitation. The FFC’s Division of Revenue submission cautioned against implementing large and expensive new government programmes. The realisation of the Millennium Development Goals and the development of the proposed National Health Insurance were, however, important in closing the gap in the health sector. Consultations should not be relegated to the tail end of the processes when such big policy decisions were proposed. Of major concern was that spending in key sectors for economic growth (agriculture and health) was projected to decrease over the medium term.

Total expenditure would grow from R748 billion in 2010/11 to R914 billion in 2013/14 which represented a 6% growth over the 2011 MTEF. While the national share of the division of revenue would decline, the share for provinces and local governments would increase. The biggest challenge for the provincial sphere was the rise in personnel spending compared to other spending items that led to growth and development.

Although the increase in the local government equitable share over the MTEF was a positive development, it should be informed by an understanding and costing of the expenditure pressures faced by municipalities. Two important issues were, however, the unconstitutional nature of aspects of the Revenue Raising Correction Component (RRC) and the potential negative effects on middle-income municipalities. The R1.8 billion in conditional grant rollovers highlighted poor performance, particularly on infrastructure. Municipalities needed to be appropriately capacitated in order to ensure that spending and the objectives of these grants were achieved. Some provinces used adjustments to fund unauthorised personnel expenses. An adjustment exercise could lead to a distortion in the constitutionally intended equity of the Provincial Equitable Share (PES) and progressive realisation by all provinces. Expenditure smoothing between the four quarters of the year would most likely lead to improved quality of spending and reduce levels of unauthorised spending.

The MTBPS was a key first milestone conversation about the budget process that would culminate in the 2011 Budget. It needed to provide more detail on the economic policy direction of the government  which framed the fiscal environment in which the intergovernmental fiscal relations system must operate, for effective FFC engagement (see document for full details).

Discussion
Mr M Swart (DA) asked which aspects of the RRC were unconstitutional.

Ms Tanya Ajam, FFC Commissioner and  AFReC CEO, answered that although fiscal capacity needed to be taken into consideration when establishing the equitable share of local governments, municipalities or provinces that did not collect should not be bailed out. Capacity, as opposed to effort, needed to be looked at here.

Mr M Makhubela (COPE) asked for more detail on the link between unemployment and a skills mismatch as well as the rise in personnel spending. What were its recommendations on corruption?

Mr Bongani Khumalo, Deputy Chairperson, answered that one problem had came in the transition from basic to higher education. This could be addressed through emphasis on Further Education and Training Colleges. This was a major challenge. Though there were policies in place to address this, implementation of these policies needed to be effective.

Mr L Ramatlakne (COPE) asked what recommendations it had on social services grants, particularly around skills development and the need for more resources to be put into healthcare, especially at the primary level. What were the rising personnel costs due to?

Mr Khumalo answered that there was strong support for these grants. However, these grants should not be viewed in isolation but along with other poverty alleviation schemes. Education was, for example, a critical factor here. FFC had found that a lot of progress had been made in improving healthcare infrastructure. Challenges came in with the complementary services such as electricity and water. As the Hospital Revitalisation Grant attempted to cover too much ground, there needed to be comprehensive review of this grant so as to streamline its objectives.

The Co-Chairperson asked what its views were on the poor spending on health by provinces.

Ms Ajam answered that budget constraints needed to be hard in order to avoid poor spending by provinces.

Department of Cooperative Governance (DCOG) presentation
Mr Masilo Makhura, Acting CFO, outlined DCoG’s spending priorities for the 2011 MTEF as well as substantial adjustments to conditional grants allocations; and presented the actual spending of DCoG for the first 6-months of 2010/11 financial year. He looked at the Medium Term Expenditure Budget Priorities focusing on Outcome 9 (A responsive, accountable, effective and efficient local government system), the transfers to municipalities and additional funding requests (see document for details).

The transfers to municipalities were:
• Municipal Infrastructure Grant
A requested has been provided for the approval for an additional R16.9 billion as an increase to the baseline allocation of the Municipal Infrastructure Grant for the 2011 MTEF, in order to meet sector targets to eradicate infrastructure backlogs.
• Bulk Infrastructure Fund (BIF)
To unlock the delivery of reticulation services by funding bulk infrastructure and procuring well located land towards addressing backlogs in order to ensure universal access to basic services. The BIF will also be utilised to upgrade, refurbish and rehabilitate bulk infrastructure such as Water and Waste Water Treatment Works.
• Local Government Equitable Share (LGES)
–This is to complement the institutional component of the LGES by funding critical skills in municipalities, prioritising water and sanitation over  the MTEF in order to build long-term municipal institutional capacity through the proposed reconfigured Municipal Systems Improvement Systems Grant (MSIG) into the Local Government  Institutional and Systems Support Grant. (LGISSG).

Additional funding requests were:
1 Special Purpose Vehicle
– The purpose of establishing a Special Purpose Vehicle is to create focussed capacity for the delivery and rehabilitation of infrastructure with the main focus on low capacity municipalities to ensure the sustainable provision of municipal infrastructure towards the achievement of service delivery targets and the Millennium Development Goals.
– The Special Purpose Vehicle will be responsible for municipal infrastructure planning, delivery and rehabilitation; the provision of technical support to enable municipalities to deliver infrastructure in a sustainable way and monitoring of municipalities performance in relation to infrastructure delivery and management.

2 Disaster Management
Since the promulgation of the Disaster Management Act, 57 of 2002 unsatisfactory progress has been made with the establishment of disaster management centres throughout the country. The requested funding is to establish the centres in 27 district municipalities and the Northern Cape province.

3 Implementation of Master Systems Plan for National Disaster Management Plan
To create and implement Information Technology and Communication Systems capability of the National Disaster Management Centre (NDMC) in support of the implementation of the Disaster Management Act.

4 Municipal Infrastructure Audit
The project is intended to assess the status of municipal infrastructure in the country through an audit. This would assist government to know what needs be done about the municipal infrastructure.

5 Local Government Turnaround Strategy
–To assist in implementing Outcome 9 and the municipal turn around strategies.

6 Township Renewal Programme
–To provide practical hands on support to municipalities in implementing economic development initiatives towards regeneration of small towns.

Discussion
Mr C De Beer (ANC) asked what monitoring tools were in place with regards to the Municipal Infrastructure Grant to monitor monies lying in the coffers of provinces. How was funding in terms of the Bulk Infrastructure Grant monitored in order to ensure effective outputs, especially in relation to water supply? How far had it progressed with its skills audit?

Mr Makura answered that although monitoring was a serious challenge the Department was performing well and was also working with the Auditor-General in auditing municipalities. It was also finalising a service level agreement with the Special Investigating Unit. The anti-corruption inspectorate, which was being established, would also assist in this regard. This skills audit was an ongoing process though much information had been gathered in this regard.

Mr Makhubela asked what activities were planned for provinces with the requested R16 billion.

Mr Makura answered that of this money, R6.8 billion was for municipalities outside of the formula. It was also requesting an adjustment of the current MIG in line with inflation.

Mr Ramatlakane asked what the Special Purpose Vehicle was.

Mr Makura answered that the objective of the Special Purpose Vehicle’s was the increase of capacity, particularly in technical areas. It would also assist especially low-capacity municipalities in this regard. The Department would, through this programme, provide direct assistance in the delivery and management of infrastructure programmes. This would not take away from the powers of the municipalities.

The Co-Chairperson asked if there was no other means by which to assist municipalities.

Mr Makura answered that it had been in consultation with other relevant departments as well as SALGA. The results of this consultation would, as soon as it was complete, be presented to Parliament.

The Co-Chairperson said that the Committee would call the Director-General to do more explaining on this. The Committee should be provided with written details of this programme.

The Chairperson asked the National Treasury representative present whether it had any additional comments to make on issues raised in the presentation.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, said that, in relation to the projected fiscal framework providing for further increases of R27.1 billion over the MTEF period currently unallocated in seven priority areas, National Treasury was not in a position to express a view on this matter as decisions still needed to be made by the relevant Ministers and Cabinet on a number of issues raised on this.

The Chairperson asked what its views were on the seeming duplication of responsibilities between the Department and other departments.

Ms Fanoe answered that it was aware of duplication and was currently working at ways in which to address this.

South African Local Government Association (SALGA) presentation
The SALGA submission dealt with vertical division of revenue, the Local Government Equitable Share, Conditional Grants, Infrastructure funding, the devolution of the Property Rates Fund Grant as well as Local Economic Development. Mr Lesetja Dikgale, SALGA Working Group Member: Finance, said that economic recovery was a welcome sign for local government and the demand for quality municipal services would increase. Municipal services needed to support the expansion of productivity in local industries and the sustainability of key economic sectors operating within municipal boundaries. Municipalities needed to improve revenue collection and maintain effective debtors and credit management controls as household consumption increased over the medium term. The local government sphere should also contribute towards the ongoing search for efficiency in public spending. SALGA had recommended to the Budget Forum for a comprehensive review of the Local Government fiscal framework to address amongst other things the vertical share of the budget. There should be a systematic review of baselines to ensure revenue allocations to local government were congruent with its full range of developmental and service delivery responsibilities and the vertical share of local government met the increasing demand for municipal services. This should be coupled with efforts to build the capacity of weaker municipalities to spend efficiently and effectively. The increase from 7.9% in 2010/11 to 8.6% in 2013/14 was a step in the right direction, but more needed to be done to achieve a responsive, accountable, effective and efficient local government system as envisaged in Outcome 9 and in terms of a fiscal review.

While funding through local government conditional grants was welcomed as an important source of funding for municipalities, the way in which it was managed needed to be reviewed. Conditional grants also needed to be re-assessed as part of the comprehensive review of the local government fiscal framework, with a view to analysing past performance and improving their operational effectiveness. A conditional grant to rural municipalities for job creation and economic development should be introduced. Its design should be simple and impose minimal administrative burden. Disaster management funding should reach municipalities earlier. Electricity Demand Side Management funding needed to be effectively targeted. Funding for the Water Services Operating Subsidy Grant should be increased to assist municipalities struggling with refurbishment and maintenance. There was no coordinated monitoring and reporting against outcomes of conditional grants.  More attention was needed to allow municipalities to access conditional grants.

In relation to infrastructure funding, the extent of rehabilitation backlogs should be quantified. Funding should be set aside through MIG (or other grants) to upgrade existing infrastructure in smaller, poorer municipalities. There should be an explicit link between MIG allocations and Local Government Equitable Share (LGES) allocations, especially in smaller municipalities. The envisaged devolvement of the housing and public transport functions to cities was welcomed. This was in line with SALGA’s recommendations to the recent Budget Forum in recognition of the demonstrated ability of cities to perform these functions and the need to better coordinate infrastructure funding for the built environment. The assigning of own-revenue instruments to municipalities (such as the Local Business Tax) was essential to allow them to borrow on capital markets. A clear implementation strategy needed to be developed for the support that the Development Bank Southern Africa (DBSA) was required to provide to municipalities for infrastructure and services. The recapitalization of the DBSA was announced in the 2010 Budget, but no update was given on what impact was made over the mid-year period.

Discussion
Mr De Beer asked what SALGA was doing to improve the capacity of weaker municipalities.

Mr Lesetja answered that it had been interacting with many municipalities in this regard.

Ms R Mashigo (ANC) asked what was meant by job-creation and economic development grants.

Mr Lesetja answered that as many rural municipalities did not have any anchor industries, unemployment figures were high. These proposed grants could be used for infrastructure development and this would encourage more private sector activity in these areas.

Ms B Ngcobo (ANC) asked how trained personnel were retained. How was it keeping track of all of its assets?

Mr Lesetja answered that the duty of retaining staff was not SALGA’s as this was largely a political issue. There were no problems around keeping track of assets on a national and provincial level.

The Co-Chairperson asked the National Treasury representative what the impact of 382 extra wards would have on the fiscus.

Ms Fanoe answered that wards were generally funded through municipality own revenue. There were two provisions within the equitable share component: the basic services component (made available to municipalities to provide basic services, particularly to the poor) and the institutional component. As the latter was linked to the number of councillors within a particular municipality, if the number of councillors were to increase this component would have to be revised. Any re-demarcation would have an impact on municipalities and these factors would have to be taken into consideration when revising fiscus allocation.

Mr Khumalo added that the Financial and Fiscal Commission had raised this issue with the last demarcation. The Commission needed to be consulted more with this process.

The meeting was adjourned.