Local Government Budgets & Expenditure Review 2008: National Treasury Report

Meeting report

2008 Local Government Budgets and Expenditure Review: National Treasury (NT) report
Mr Kenneth Brown, Chief Director: Intergovernmental Policy Planning, National Treasury, led a delegation from National Treasury which briefed the Committee on the 2008 Local Government Budgets and Expenditure Review, 2003/04-2009/10 Report compiled by National Treasury

Mr Brown noted that the rationale behind the review was to allow the National Treasury to measure the progress made by municipalities, to determine whether municipal budgets allocated funds in line with development priorities, to assess whether municipalities understood legislation that pertained to local governance and finance, and to ascertain whether municipalities actually contributed towards effective service delivery which ultimately culminated in a better life for their citizens.

The Review identified at least two related trends that had impacted on the performance of municipalities in combating poverty, supporting economic growth and in strengthening their own governance and service delivery capacity.

First, municipal responses to demands for additional or improved infrastructure and services resulting from sustained economic growth have been constrained in a number of ways. There had been growing evidence that municipal services were under-priced relative to the cost of production.

Second, the increased reliance of municipalities on transfers from national government to fund their activities had grown substantially, particularly in larger urban municipalities. 

Socio-economic and Fiscal context for Local Government
The 283 municipalities that comprised South Africa operated in dissimilar social and economic contexts as some were extremely rich and successful, whilst others were poor and hampered by organisational and institutional problems.

Many rural municipalities had experienced a phase of a reduction in the average size of households, as many rural people had migrated to urban cities where the population had grown by 5,7%. Rural communities accounted for the larger percentage of reliance on social grants whereas unemployment had been highest in urban areas
 
The Review revealed that local government expenditure had contributed 6, 9% of South Africa gross domestic product (GDP) between 2003/04 and 2007/08 as well as 24 % percent of total public sector infrastructure expenditure between 2004/05 and 2007/08.

Municipalities continued to face important fiscal challenges such as the growing dependence on government conditional and unconditional grants, inadequate maintenance expenditures and high outstanding consumer debt, totalling R44,1 billion in December 2007. National Treasury had decided to allocate more funding to municipalities.

Revenue and expenditure trends in local government
Mr Bernard Mokgabodi, Director, Local Government and Budget Analysis: National Treasury, said that the ratio of municipal expenditure to total government expenditure had increased from 20,8% in 2003/04 to 23,44 % in 2007/08. This was largely due to the national transfers that had been allocated to municipalities associated with the FIFA 2010 World Cup.

The total operating revenue of municipalities had grown by 7% annually for the period between 2003/04 and 2006/07. This was largely due to expenditure on FIFA 2010 World Cup projects as well as the funding of pro-poor basic services.

He noted that the equitable share grant for municipalities had grown by R11, 7 billion between 2003/04 and 2006/07, and was set to increase R12,1 billion over the medium-term, with the metropolitan municipalities taking the major share. He set out more detailed information in the form of tables (see attached document)

Metropolitan Finance
Mr Sam Kgatle, Director, Local Government and Budget Analysis, National Treasury, said that South Africa had six metropolitan municipalities:  namely, the City of Cape Town (CCT), City of Johannesburg (CoJ), City of Tswane (CoS), Ekurhuleni, e-Thekwini and Nelson Mandela Bay (NMB).

These metropolitan areas formed the economic centres of the South African economy and their combined budgeted expenditures totalled 57,5% of all municipal budgets for 2007/09. They housed 36,8% of all South African households. Further statistics were set out in the attached document.

Intergovernmental Transfers
Mr S Mashaba, Deputy-Director, Local Government and Budget Analysis: National Treasury, said that between 2003/04 and 2006/07 municipalities had generated own revenue of R408, 2 billion, of which metropolitan areas had generated 52%. This meant that the remaining 256 municipalities relied heavily on intergovernmental transfers to fund their projects and service delivery.

The Municipal Infrastructure Grant (MIG) accounted for 54,1% of all infrastructure transfers between 2003/04 and 2009/10, with indirect transfers that comprised 24% of total infrastructure transfers.

Problems had been identified as municipalities had not yet instigated their own plans to look for funding outside of government structures, as well as having experienced problems in adequately administering the grants allocated to them.

Leveraging Private Finance
Mr Tebogo Motsoane, Senior Economist: National Treasury, said that on average 57% of all external loans of municipalities had been with private sector institutions, whilst the rest were with the Development Bank of Southern Africa (DBSA).

It was distressing that the total long term loans to municipalities amounted to R15,6 billion in June 2007, as municipalities could actively engage and lobby the private sector to enter into Public Private Partnerships so that these private institutions could raise the necessary debt and equity to finance various government projects. He set out some further information and statistics in the detailed document.

Water and Sanitation
Ms Wendy Fanoe, Director: Local Government and Finance Policy, National Treasury,  said that access to basic water and sanitation had improved from 4,1% and 6% respectively from 2001 to 2007 and that the largest expenditure on water and sanitation had taken place in the metros. This could be attributed to the fact that they had larger areas to serve as well as large and many businesses, whereas rural expenditure was more focused towards a smaller group of people and businesses.

Operating expenditure made up 16% of all the total sum of municipal sanitation expenditure for 2006/07 and capital expenditure increased at a faster pace than operating expenditure (5,1% as opposed to 1,7% in real terms).

The Department of Water Affairs and Forestry had made an assessment of South Africa’s water needs over the next 25 years and emphasised the sustainability and how best to manage water. Government had also introduced processes that would ensure that water was distributed equitably so that the right balance between agriculture, households, business and the public sector could be found.

The breakdown of the sanitation budget was different to that of the water budget, as sanitation was more capital intensive and could not be bought in bulk. It was important that people should be educated and made aware of hygiene issues

The challenge with water delivery stemmed from the realisation that South Africa faced a scarcity of water. This prompted government to implement well structured policy directives that would ensure that water was well managed

She added that many of the municipalities did not have water service authority functions and that in many cases grants that had been allocated to district municipalities were used for infrastructure development and not for water service delivery.

Electricity
Ms Fanoe said that municipalities had made giant strides in providing access to electricity, as 10% more households had been connected to the national electricity grid in 2007 than in 2001, and that 360 000 more households had received free basic electricity in 2006 than in 2005.

She added that the Community Survey of 2007 showed that the Eastern Cape had the lowest percentage of households that had access to electricity and that many municipalities did not invest in infrastructure as was required of them.

Expenditure on electricity service delivery had increased from R14 billion in 2003/04 to R23 billion in 2009/10, and the operating expenditure made up 83 % of all total municipal electricity expenditure for 2006/07.

Roads and Public Transportation
Mr Mashaba said that a significant portion of public roads had been managed by municipalities and that much pressure had been placed on these municipal roads, as they were mainly used in provinces where the mining sector was prevalent.

He added that Gauteng and the Western Cape had seen the highest increase in motor vehicle registration and that the total number of cars on South African roads had increased by 22% (with 8,2 million vehicles currently on the roads)

National Treasury had engaged the South African National Roads Agency (SANRAL) to partner with municipalities, as there was currently no alignment and planning between municipalities, mines and provincial authorities around roads

Managing the built environment
Ms Z Mncwango, Director:Local Government and Budget Analysis, National Treasury, said that corruption had been one of the major problems that municipalities faced when it came to the built environment, as it was possible for the private sector to acquire land through channels , other then the local government authorities. She added that complex institutional arrangements made coordination between the private sector and local municipalities difficult and that they lacked the mechanisms to prevent corruption.

There was a need for effective management of planning functions through robust municipal asset management that included municipal land. It was far easier for rural areas to manage their assets because the register of assets was small in relation to those of metropolitan municipalities.

The delivery of adequate and safe housing had not moved at the desired pace. Where there had been movement, it was unfortunate that old apartheid notions had been enforced, as these houses were generally built far outside of cities. The metropolitan municipalities accounted for 60% of all housing backlogs.

There was an urgent need for government to allocate funding for maintenance, as many poor municipalities did not have the operating budget to finance maintenance.

Municipal Finance Management Act (MFMA)
Mr T V Pillay, Chief Director, MFMA: National Treasury,said that one of the biggest problems that municipalities faced was their poor understanding of the MFMA and the directives that emanated from it. There was common understanding that the emphasis on the lack of capacity had placed constraints on municipalities to administer their finances effectively.

There was a need for the National Treasury to move ahead in a more structured manner with the MFMA and to further assist municipalities, via the Municipal Units located in the nine provincial treasuries.

The MFMA had emphasised that the framework it provided talked about modernising budgeting and financial management through budget and financial reporting, accounting reforms, asset management and supply chain management. The Treasury was planning workshops to help municipalities in this regard.

An important element of oversight that the MFMA covered should be enhanced, and councillors would receive training by both National Treasury and the Department of Provincial and Local Government (DPLG) to improve financial governance.

Personnel
Mr Conrad Barberton, Director, Local Government and Budget Analysis: National Treasury, said that municipalities had employed 200 000 people in 2006 and contributed 1,6 % to South Africa's overall employment rate. In the 70 mostly-rural communities, municipal employment had contributed only 0,7 % to employment.

Total municipal expenditure on personnel increased from R22,2 billion in 2003/04 to R29,3 billion in 2006/07. It increased at an annual rate of 9,8 % between 2003/04 and 2006/07.

Mr Barberton said that a municipality's personnel should be regarded as its greatest asset and that it was important that the right people occupied the right positions within the bureaucracy of a municipality.  There was currently a vacancy rate of 21% across of all municipalities.

Discussion
Mr P Ngcobo (Finance Committee: KZN Provincial Legislature) said that in many rural and poor municipalities about 80% of their annual budget had been utilised for salaries, leaving only 20% for service delivery. This should not happen and it was important to find mechanisms to deal with this problem.

In relation to road infrastructure, he said that the Department of Transport's budget of R4 billion had to be adequately distributed, as it had come to his attention that in some municipalities and provinces there had been no clear distinction between access and provincial roads.

He asked for clarity on whether there had been any unit that dealt with Public / Private Partnerships initiatives.

The Chairperson said that it was very important that the problems raised had to be dealt with, especially in terms of the Expanded Public Works Programme (EPWP) and the lack of involvement by municipalities. He added that the overall vacancy rate was alarming, as it indicated that service delivery was not happening as it should, and he found it strange that the National Treasury still wanted to give more money to municipalities that clearly did not have the capacity to spend that money.

Mr S Letsholo, Senior Manager: South African Local Government Association (SALGA) said that SALGA, in conjunction with the DPLG, had decided to conduct workshops with councillors on what was expected of them in terms of their oversight functions

Mr M Ndimande, Senior Manager, Department of Provincial and Local Government (DPLG) said that the debate around municipalities had to be deepened so that the right solutions could be found, as the under-pricing of services had become a real problem. He also took issue with the National Treasury on the decision to allocate more funding to municipalities as somewhat irresponsible, as it might encourage more mismanagement.

In relation to water and sanitation, Mr Ndimande noted that it would be best to interrogate the budgets of municipalities to see whether they were fulfilling their promises as the Department of Water Affairs and Forestry had made money available to municipalities for this purpose.

He added that when a private company utilised external channels other then a municipality for approval to start construction this did not necessarily constitute corruption, and that municipalities had to make sure that their Chief Financial Officers (CFOs) and Municipal Managers (MMs) operated within a framework that would lay the foundation for good corporate and financial governance, as well as service delivery.

The Chairperson noted that the Municipal Systems Act had provided the legal and constitutional framework on what the duties, functions and role of the MMs entailed.

Mr E Sogoni( ANC, Gauteng) said there was a need to discuss the way forward and to come up with concrete solutions that would ultimately be of benefit to municipalities. He said it would be interesting to know why people had migrated in large numbers to urban areas.

He added that loans granted by the DBSA had been sitting in municipal coffers for considerable time, as they did not spend these funds, and that he failed to see why conditional grants such as the MIG were allocated to metropolitan municipalities as they could do without it.

He believed it was unacceptable that capital expenditure amongst poorer municipalities had been so low, and that 15 years into democracy the smaller municipalities still did not attract sufficient economic sectors. This gave credence to the President's statement that South Africa consisted of two nations. There was a dire need for municipalities to re-orientate their mindsets to become more economically viable.
 
Mr Sogoni stated that the issue of water and sanitation had been an ongoing one, and that Limpopo had experienced several problems with this service, as its budget was too small to adequately service the community.

Mr Sogoni said that the recent deaths of 80 babies due to cholera should not be shouldered by the municipality, as an integrated response was necessary that ensured that water quality was maintained at all times.

He added that it was evident that the implementation of the Public Finance Management Act (PFMA) and MFMA had not gone according to plan, as many municipal officials and councillors did not seem to understand what was covered by these two Acts.

Mr B Mkhaliphi (ANC, Mpumalanga) thanked National Treasury for the Review and said that he had observed that the definition of “water infrastructure” was a very narrow definition, and did not include the actual source as well. It was not only about pipes, but about water itself, and a municipality's capacity to act as a water service provider.

Mr D Botha (ANC, Eastern Cape) said that the Division of Revenue Act (DoRA) should allow for some money to be allocated for maintenance, as municipalities had to spend money on other projects and could not budget for maintenance. He said that some municipalities had major problems with sport facilities that had been deemed unsafe, and could not be fixed by them owing to lack of funding.

He added that most district municipalities had utilised government grants to pay salaries and had invested funds in their own bank accounts that had been meant for lower graded municipalities. This was unacceptable, as district municipalities generally utilised the interest on these investments to finance certain projects. Mr Botha said that the grading of municipalities had clearly led to problems in terms of filling vacancies, and that district municipalities had to be limited in terms of what they could do.

Mr Kishore Harie (Manager, SALGA, Kwazulu Natal) said that one of the biggest problems was the lack of coordination of the different types of government transfers and grants, as well as the built environment, but that this would be addressed by the policy review mechanisms currently in place.

He added that his concern was with the information and conclusions that had been made by National Treasury, as this had been based on a two year period. It was important for National Treasury to be careful not to place too much emphasis on a two year plan, as indicated by Mr Barberton, in relation to personnel.

Mr Z Kolweni (ANC, North West) said that the Review had indicated that municipalities had to play a more proactive role in fast tracking service delivery as well as sound financial practices. They should stop pleading poverty and start to spend their budgets according to the business plans they had submitted.

He added that an active engagement was necessary to address the issues around the built environment as government had spent a lot of money on it.

The Chairperson said that the Committee would like to see that all the problems raised in the meeting and the Review were  dealt with, as provinces like Limpopo and the Eastern Cape had been faced with major issues, especially as they were largely rural in nature.

He added that all the relevant stakeholders had to engage with one another and find suitable solutions so that municipalities, especially rural municipalities, could strengthen their capacity and financial positions.

Mr Brown noted that National Treasury had taken note of what was discussed and that he welcomed further input in writing from the various stakeholders and the Committee on what was discussed.

The meeting was adjourned.