Policy of Fund Reallocation for Effective Service Delivery

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The policy outlines the re-allocation of funds from underperforming provinces and metropolitan municipalities to those performing well to ensure effective service delivery. It includes legislative background, stopping and reallocation processes, considerations for fund reallocation, and the importance of transparency and expenditure control in utilizing allocated funds efficiently.


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Policy of Fund Reallocation for Effective Service Delivery

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  1. POLICY OF RE-ALLOCATION OF FUNDS FROM POOR PERFORMING PROVINCES AND METROPOLITAN MUNICIPALITIES TO THE PERFORMING ONES PRESENTED BY: National Treasury Division: IGR Date: 17 May 2023 Portfolio Committee on Human Settlement

  2. 2 PRESENTATION OUTLINE Legislative background Stopping and reallocation process for provinces Results for stopping and reallocation for DHS conditional grants (HSDG and ISUG) - provinces Stopping and reallocation process for Metropolitan municipalities Results for stopping and reallocation for DHS conditional grants (USDG and ISUPG) - municipalities Considerations on how to reallocate the stopped funds (CG)

  3. 3 Legislative background to stopping and re-allocation of Conditional Grants Section 216 of the Constitution provides for the NT to establish and prescribe measures to ensure both transparency and exp control (stopping) Section 38 of MFMA for municipalities (and section 216 (2) for provinces) provides that when stopping is contemplated, there must be consultation Stopping and reallocation are covered in sections 18 and 19 of the Division of Revenue Act (DoRA) respectively Section 18 states that National Treasury at its discretion or on request from transferring officer or receiving officer may stop transfer of funds allocated in schedule 4 or 5 to a province or a municipality. The transfers are stopped if: There is a serious or persistent breach of DoRA read with other legislation (Constitution, PFMA amd MFMA) If National Treasury anticipates substantial underspending For purposes of assigning of a function from a province to a municipality The intention of funds being stopped is to ensure that funds are used for the intended purpose while ensuring transparency and expenditure controls. If funds are not stopped, they end up being used for unintended purposes and thus service delivery not being provided, and government also ends up borrowing unnecessarily

  4. 4 Legislative background to stopping and re-allocation of Conditional Grants Section 19 states that when schedule 4 or 5 allocations are stopped, National Treasury may after consulting with the transferring officer and the relevant provincial treasury determine the portion of the allocation to be reallocated as the same type of allocation as it was originally, to one or more provinces or municipalities on condition that the allocation must be spent by the end of that financial year Further Section 19 states that if the transferring officer of a schedule 6 allocation indicates in writing to National Treasury that a portion of the allocation is likely to be underspent, or needs to be reprioritised to meet a priority, the National Treasury may, at the request of the transferring officer determine that portion to be reallocated, as the same type of as it was allocated originally, to a provincial department of another province or to another municipality If funds that have been reallocated are not spent by the end of the financial, they are eligible for roll-over The intention of reallocating funds is to ensure that service delivery is provided where funds can be used and that borrowed funds are utilised in the most efficient way

  5. PROVINCIAL CONDITIONAL GRANT PROCESS STOPPING AND REALLOCATION

  6. 6 Stopping and reallocation process - Human Settlements 1 of 2 In terms of section 10(5) of the Division of Revenue Act (DoRA), the transferring officer of a schedule 5 grant is responsible for monitoring of financial and non-financial performance of provincial departments Section 12 requires, provincial departments to submit monthly (financial) and quarterly (non-financial) reports to the Department of Human Settlements (DHS), which details progress on implementation The DHS reviews performance of grants with provinces on at least a quarterly basis with provincial departments to account for their performance against predetermined objectives identified in their approved business plans. The review highlights which provinces are performing and which ones are at risk of underperforming In between reviews, the DHS regularly engages with at-risk provinces to improve their performance, with provinces given an opportunity to demonstrate how their performance can be improved If the DHS is not convinced by the departments plans, they invoke section 17 of the DoRA, which provides for transfers to provinces to be withheld for 30 days. Section 17 also provides for the withholding of funds for more than 30 days but not exceeding 120 days. In the second instance, the DHS requires National Treasury s approval. In both instances however the National and relevant Provincial Treasuries are notified, of the DHS s intention

  7. 7 Stopping and reallocation process - Human Settlements 2 of 2 The DHS must give the provincial department 7 working days to motivate why the funds should not be withheld. If the DHS is not persuaded by the provincial department s submission, the withholding is effected If the withholding and subsequent engagements do not result in improved performance, the sector then proceeds to the next step where funds can be stopped, in terms of section 18 of DoRA, from the underperforming province In the case of human settlements such decisions are taken at the sector MINMEC where all provinces are represented Section 19 of DoRA makes further provision for the planned stopped funds to be reallocated to provinces have performed well. These decisions are formally communicated in a request to National Treasury to approve National Treasury checks that DoRA processes, including section 17, have been adhered to. In addition, National Treasury conducts an analysis of the request, considering provinces financial and non-financial performance. Once satisfied that the request is in line with provisions of the Act and will minimise underspending, a recommendation is made to the Minister to approve All relevant provincial treasuries affected by the stopping and reallocation are formally informed of the adjustment of funds Once the Minister has applied his mind and approved the request, the stopping and reallocation is formalised by the publication of a government gazette. Affected provinces must then table an adjustment budget in their provincial legislatures to adjust their appropriation in line with the published gazette; and adjust their business plans The DHS amends the payment schedule to account for the gazette and makes transfers to relevant provinces

  8. 8 Stopping and reallocation 2018/19 2022/23

  9. MUNICIPAL (METROS) CONDITIONAL GRANT PROCESS STOPPING AND REALLOCATION

  10. 10 NT process for stopping of funds - Metros Before stopping any funds in terms of section 18 of DoRA, around the end of January each year, NT sends communication to all TOs to make a submission and details of their intentions to adjust the allocations to their respective municipalities in terms of sections 18 and 19 of DoRA Following this, NT then writes to all municipalities that are spending less than 40 per cent of their allocations (municipalities with allocations less than R100 million), as well as municipalities spending less than 45 per cent of their allocation (municipalities with allocations above R100 million Municipalities are given ito section 38 of MFMA seven days to make representations as to why their allocations should not be stopped, including representations on the following: Why expenditure reported as at 31 December 2022 is below 40 per cent Progress report against approved projects (provide list/names of approved projects) Representation on the cash coverage for grants transferred (Liquidity ratio) Representation on the initial cash flow projections against actual performance Progress report on any approved rolled over for 2021/22 financial year Commitment that the allocated funds are committed and that they will be fully spent by the end of the financial year, 30 June 2023, i.e., Commitment that the municipality will not request rollover against the proposed stopped funds Representation on all projects awarded after the second quarter of the municipal financial year as at 31 December 2022 Representation on any commitments made against Supply Chain Management Regulation 32 projects in terms of the Supply Chain Management policy and chapter 11 of the MFMA and progress made against these projects Declaration by the municipality on the amount that should be stopped by National Treasury; and An acceleration plan against the 2022/23 approved implementation plan Thereafter, NT reviews the representations and makes a recommendation on whether funds should be stopped or not based on the municipal representations and supporting information

  11. 11 Urban Settlement Development Grant 2022/23 USDG STOPPING and REALLOCATION Allocation Transferre Dec Exp- Municipalit y Dec Exp- NTO Exp as % of Allocation: Muni Exp as % of Allocation: NTO No. of Munics NT wrote to for No. of Munics who responded No. of munics that their fund Proposed Stopping Final stopping Re- d to date alloction Name of Province Buffalo City Nelson Mandela Bay Mangaung Ekurhuleni Johannesburg Tshwane eThekwini Cape Town Total 496 166 588 945 491 760 1 282 202 1 204 509 1 044 111 1 279 036 965 544 7 352 273 307 623 250 148 344 232 576 991 741 062 647 349 427 122 584 432 3 878 959 123 093 25% 0% 25% 23% 37% 0% 19% 33% 21% 0% 0% 26% 23% 0% 0% 27% 0% 10% 1 1 1 1 1 1 1 1 148 850 176 684 143 468 345 001 121 428 296 145 450 525 127 000 296 100 1 100 000 200 000 1 1 1 1 417 644 300 318 248 959 320 054 1 560 204 339 200 1 100 000 762 300 6 6 2 1 531 965 200 000 200 000 A total of R1.6 billion was proposed for stopping from the 6 metros Following responses from the metros only R200 million was stopped from 2 metros NMB in response indicated non reporting as the reason for zero expenditure and reported 33 per cent spending Buffalo City - the projections reflect expenditure as per the agreement with the department City of Tshwane also indicated non reporting and reflected 50 per cent spending as per their response Reasons for stopping for the 2 metros: Ekurhuleni - The municipality did not provide detailed information as requested by the NT letter for stopping and the stopping was recommended by DHS eThekwini slow performance against the allocation at 19 per cent, unrealistic cash flow and as per the recommendation from DHS Reallocation was done as per the recommendation from DHS and funds available for stopping

  12. 12 Informal Settlements Upgrading Partnership Grant 2022/23 USDG STOPPING and REALLOCATION Allocation Transferred to date Dec Exp- Municipality Dec Exp- NTO Exp as % of Allocation: Muni Exp as % of Allocation: NTO No. of Munics NT wrote to for proposed No. of Munics who responded No. of munics that their fund stopped Proposed Stopping Final stopping Re- allocation Name of Province Buffalo City Nelson Mandela Bay Mangaung Ekurhuleni Johannesburg Tshwane eThekwini Cape Town Total 282 122 334 876 279 617 729 065 684 888 593 685 727 265 549 012 4 180 530 247 122 269 876 241 617 639 065 604 888 543 685 687 265 504 012 3 737 530 63 368 94 424 27 997 36 828 258 346 223 393 177 382 254 496 183 121 1 255 987 22% 0% 13% 35% 25% 0% 29% 32% 22% 33% 8% 13% 35% 33% 30% 35% 33% 30% 1 1 1 1 1 1 1 1 8 1 1 1 1 1 1 18 425 105 953 75 019 33 280 50 562 60 092 36 410 36 484 416 225 36 000 75 000 36 370 258 347 172 123 1 1 1 7 214 475 174 934 919 617 111 000 111 000 2 111 000 Poor planning Slow progress on implementations of projects and spending of funds Non appointment and late appointment of contractors/service providers SCM challenges leading to non performance/late appointment of contractors/service providers Delays in implementation of projects due to poor performance by contractors Mangaung Metro surrendered funds to be stopped due to state of readiness Reallocation recommended by DHS based on the available stopped funds

  13. 13 Considerations on how to reallocate conditional grants In terms of section 19 of the Act, municipalities reflecting better performance will be considered for reallocations and assist them to fast track their service delivery mandate and bring forward their priority projects. The municipalities receiving additional funds have projects that are ready for implementation but without adequate funding & have capacity and capability to absorb the additional allocations and to realise the grant objectives Municipalities that were legible for re-allocation must - Reflect 70 per cent expenditure ( best performing metros basically) Comply with MFMA section 71 reporting Governance, institutional and financial stability Projects that are not ready for implementation in the current year A request by the transferring national officer

  14. THANK YOU For information on local government finances, please visit: https://municipalmoney.gov.za For additional information on national and provincial budgets, please visit our new budget data portal: https://vulekamali.gov.za

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