Intergovernmental fiscal relations in the water service sector – Assessing oversight and accountability measures
28 January 2020
Financial sustainability is crucial to local government’s ability to fulfil its constitutional objectives and ensure that local communities are afforded basic services. The Municipal Finance Management Act (“MFMA”) was enacted to establish procedures and mechanisms for purposes of supporting this endeavour and ensuring sound, sustainable and accountable financial management in municipalities. However, in 2019, 34 percent of municipalities disclosed an aggregate deficit of R5.8 billion on their operating accounts – severely impacted by the lack of accountability within municipal structures. The dire state of municipal finances is particularly evident in the deficient development and maintenance of infrastructure, with the Auditor-General citing “the lack of attention paid to water and sanitation infrastructure” as a key concern.
While funding models may differ, water services infrastructure is in large part financed by intergovernmental fiscal transfers. Smaller and rural municipalities, in particular, rely heavily on transfers from national government in financing their capital and operating budgets while metropolitan municipalities and emerging cities rely less on them. As the condition of water infrastructure is deteriorating, the question is whether these funds are being used appropriately. This brief evaluates the strength of accountability and oversight mechanisms in intergovernmental fiscal relations, particularly relating to water infrastructure.
INTERGOVERNMENTAL FISCAL INSTRUMENTS IN THE WATER SERVICES SECTOR
Local government is constitutionally entitled to an equitable share of revenue raised nationally which enables it to provide basic services and perform allocated functions. The Division of Revenue Act (“DoRA”) is published annually and sets out the equitable share and conditional allocations of revenue raised nationally among national, provincial and local spheres of governments.
Three conditional water-related allocations are made available to local government in the current intergovernmental fiscal system.
First, the municipal infrastructure grant (“MIG”) is designed to provide capital funding to eradicate basic municipal infrastructure backlogs for poor households, microenterprises and social institutions servicing poor communities.
Secondly, the regional bulk infrastructure grant (“RBIG”) is allocated to water services authorities to develop regional bulk water infrastructure. It fulfils two primary purposes. The first is to develop new – but also to refurbish, upgrade and replace ageing – bulk water and sanitation infrastructure that connects water resources to infrastructure within communities. In addition, the RBIG should address water conservation and demand management projects, either implemented in bulk infrastructure projects or used to facilitate local water conservation and water demand management projects that will directly impact on bulk infrastructure requirements.
Lastly, the purpose of the water services infrastructure grant (“WSIG”) is far-reaching. It should be used to:
facilitate the planning and implementation of various water and sanitation projects to accelerate backlog reduction and enhance the sustainability of services especially in rural municipalities;
provide interim, intermediate water and sanitation supply that ensures provision of services to identified and prioritised communities, including spring protection and groundwater development;
support municipalities in implementing water conservation and water demand management projects; support the closeout of existing Bucket Eradication Programme intervention in formal residential areas; or
support drought relief projects in affected municipalities.
The MIG is transferred by the Department of Co-operative Governance and Traditional Affairs(“CoGTA”) to municipalities. The RBIG and the WSIG allocations are transferred to municipalities as direct and indirect allocations. Direct allocations are transferred by the Department of Human Settlements, Water and Sanitation (“Department”) to municipalities while indirect conditional allocations (also referred to as in-kind allocations) are administered by the Department itself for the benefit of municipalities. Therefore, accountability for performance in relation to direct grants lies with receiving municipalities, while accountability for indirect water-related grants lies with the Department.
ACCOUNTABILITY AND OVERSIGHT MECHANISMS
All conditional allocations (direct and indirect) are accompanied by a general framework which sets out requirements relating to the allocation, including the allocation criteria, the conditions attached to the allocation, the responsibilities of relevant parties, and the expected outputs for each grant. Clear parameters exist against which performance of direct and indirect allocations can be assessed.
Traditional lines of accountability for direct conditional grants flow from municipalities to the Department (or CoGTA, when referring to the MIG); and from the relevant department to National Treasury and Parliament.
Internally, municipal councils must exercise oversight to ensure the approved infrastructure is developed in terms of the framework accompanying the grant. To assist the council, oversight functions are funnelled through internal committees before reaching the council. The municipal manager and administration must account to the council in annual financial statements which have been reviewed by these committees; while oversight committees must review the financial statements and provide the council with an authoritative and credible view of the municipality’s compliance with the MFMA and DoRA. Council then considers the annual report and adopts an oversight report containing its comments on the annual report.
On a national level, the Department must monitor the municipality’s performance in line with the framework. The municipality must account to the Department in monthly financial and quarterly non-financial reports. In addition, it must evaluate its financial and non-financial performance in terms of the allocation and submit it to the Department and provincial treasury. The Department also performs site-visits to monitor performance.
Indirect RBIG or WSIG allocations, on the other hand, are administered by the Department but implementation is usually contracted out to an implementing agent, like a water board or private actor. The implementing agent must submit monthly financial and quarterly non-financial reports to the Department, which must monitor performance.
The framework accompanying the annual DoRA sets out clear perimeters against which performance must be assessed. In addition, the DoRA – together with the MFMA – places clear and regular reporting obligations on the municipality receiving the grant to account for its performance. From a procedural perspective, municipalities (as grantees) are made aware of the standards and expectations regarding the grant, and the Department is provided with adequate information to assess municipal performance.
The problem lies with consequences for poor performance and management of transfers. While the DoRA allows the Department to withhold the transfer of a direct grant allocation, and National Treasury may even stop the transfer to a municipality for underspending or a persistent material breach of the DoRA or the MFMA, these consequences are not often put in effect. In addition, material non-compliance by the Department with DoRA has been reported by the Auditor-General.
Underspending is particularly stark for direct allocation transfers. In the last financial year, for example, municipalities only spent 48 percent of the budget allocated for RBIG projects and 24 percent for WSIG projects.
Moreover, where transfers are withheld or stopped, the effects are most often to the detriment of consumers in need of reliable water services infrastructure. Injunction is rarely carried out against those who are responsible for managing transfers and performance. Current sanctions against poorly managed transfers and underspending are not strong enough to enforce proper performance.
While the DoRA and the MFMA have established appropriate mechanisms to ensure spending is transparent, regularly monitored and accounted for, lack of consequences for poor management and performance facilitates a culture of impunity within the transfer system – to the detriment of consumers.
Michelle Toxopeüs, Legal Researcher, HSF, 28 January 2020
 56 of 2003.
 Stats SA, “How financially independent are municipalities?”, 28 March 2019; and FFC, “The Incentive Effects of Intergovernmental Grants: Empirical Evidence from South Africa’s Municipalities”, 20 March 2019.
 Section 214 of the Constitution.
 The Division of Revenue Act 16 of 2019.
 Schedule 5B grants, in terms of DoRA, 2019.
 Schedule 5B (direct) and 6B (indirect) grants, in terms of DoRA, 2019.
 Schedule 5B (direct) and 6B (indirect) grants, in terms of DoRA, 2019.
 Internal audit units and municipal audit committees are established in terms of sections 165 and 166 of the MFMA respectively. Municipal public accounts committees (“MPACs”) are established in terms of section 79 of the MFMA. See “Municipalities II: Assessing mechanisms of municipal oversight” for an assessment of municipal audit committees and MPACs.
 Section 166(2)(b) of the MFMA.
 Section 129 of the MFMA.
 Section 12 of DoRA, 2019.
 See the Department’s Annual Report for 2017/18, p102.
 In circumstances where a municipality fails to comply with the DoRA or cannot provide a satisfactory explanation for its underspending. See section 18 of the DoRA, 2019.
 Or if National Treasury suspects the municipality will substantially underspend. See section 19 of the DoRA, 2019.