National Treasury's Response to the FFC's Costed Norms Approach; Abuja Treaty

NCOP Finance

10 October 2000
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Meeting report

FINANCE SELECT COMMITTEE
11 October 2000
NATIONAL TREASURY'S RESPONSE TO FFC'S COSTED NORMS APPROACH; ABUJA TREATY ESTABLISHING AFRICAN ECONOMIC COMMUNITY

SUMMARY

The National Treasury criticised the Financial and Fiscal Commission's proposed costed norms approach to budgeting as unworkable. The lack of data availability was emphasised. There was discussion on various issues arising from this presentation, including what the Committee should do when it hears contradictory viewpoints from the National Treasury and the Financial and Fiscal Commission. The Committee was briefed on the Abuja Treaty Establishing the African Economic Community. They then voted to recommend ratification, with the ACDP abstaining. The Committee's upcoming trip to Germany, India and Australia was discussed.

MINUTES
The Chair apologised for the delay in starting the meeting fifiteen minutes late as it was necessary to have a quorum. Certain members indicated that they would have problems staying longer than an hour. The Chair threatened to adjourn the meeting if quorum could not be maintained, stating that the meeting had been planned for a week and was scheduled to last for three hours.

Ministry of Finance on the Financial and Fiscal Commission Proposals
Mr Ismail Momoniat, Chief Director of Intergovernmental Relations for the National Treasury, began with some background to put the Department's response in perspective. He said intergovernmental systems are developing as provinces get more revenue powers, as legislation gives effect to Section 228 of the Constitution, and as there is consideration of granting borrowing powers to the provinces. The biggest difficulties remain with respect to the local sphere.

Mr Momoniat explained that the current approach to budgeting involves both a vertical division and a horizontal division. The vertical division between the three spheres of government is a political judgement for Cabinet, as there are always more pressures than funds available. If Cabinet finds that the government has extra money beyond what was in the MTEF baseline budget, then it can decide, for example, that crime is a priority and say that the extra money goes to policing. This determination effectively determines to which level of government the new money must go. Currently, there are baseline budgets over the next three years, with the provincial share planned at about 57,4% for next year.

The horizontal division amongst the nine different provinces is currently determined on the equitable share formula. This equitable share formula had been agreed upon by both the FFC and the National Treasury prior to its implementation. After much interaction between the two bodies, they had rejected something similar to the FFC costed norms proposal.

Mr Momoniat explained that the current equitable share formula has seven components, with the division among provinces being based on certain indicators for needs with respect to each component. These are as follows:
· education (41%) - based on the number of learners
· health (19%) - per capita cost for primary health care services weighted for age and gender and adjusted by poverty (poverty is a proxy for health need).
· social grants (17%) - based on the numbers of elderly persons, children, and disabled persons
· basic grant (7%) - based on the province's share of the population
· backlog grant (3%) - based on current backlogs in schools and hospitals and rural share
· economic activity (8%) - based on the province's remuneration data
· institutional (5%) - divided equally.

All data used is official data in order to prevent what Mr Momoniat called "civil wars" about data. For example, the number of learners is determined by the National Department of Education. There is a major problem with the poor quality of available data. This is why some of the indicators used are proxies. For example, remuneration data is used instead of data on provincial Gross Domestic Product. The overall effect is redistributive. For example, the Northern Province gets 13,6% of money for 12,1% of the population. The Eastern Cape gets 18,5% of education money and 19,6% of welfare money for just 15,5% of the population.

Mr Momoniat challenged the FFC proposal of changing to a costed norms approach. He wanted to know what was wrong with the current formula. Further any change when dealing with three-year budget allocations will have a destabilising effect as will changes to parameters or the formula.

Mr Momoniat explained that the current formula is based on relative demand, while the FFC approach is based on relative costs. He stated that what must be kept in mind in considering these two options is the inadequacy of data. It is also important to consider the reason for differences that exist amongst the provinces. Some are from structural legacies. For example, provinces do not spend equally on health care. Part of this is because some provinces have academic complexes that eat a lot of money, even if conditional grants are supposed to fund these. Different provinces may have different preferences on how they spend their money. And there can also be apparent differences because of data problems. For example, it is common for principals to claim to have twice as many students as they have in the hopes of attracting greater funding. It is also possible that teachers may be more expensive in Gauteng than in other provinces. Thus, many factors can affect differences in spending patterns amongst the provinces.

Mr Momoniat explained that the National Treasury's position is that an FFC-style costed norms approach may be a valuable analytical tool, but it cannot be used for budget allocation. However, it is difficult to respond to the FFC because it is unclear what it is even proposing. The FFC does not make clear if its costed norms approach is a methodology, a specific formula or a set of actual shares. He stated that the FFC does not identify the actual shares as the data is not there - which raises again the question of whether implementation would be possible.

Mr Momoniat emphasised that the demand for funds will always exceed the supply, even in a rich country. Using a costed norms approach does not get around this. In addition, it confronts some additional challenges because it is doubtful that certain items can even be costed. For example, it is unclear how one costs an item like justice or prisons. Using a costed norms approach could even create a type of bias against such departments that cannot be costed.

Mr Momoniat observed that the FFC has to answer some questions regarding methodology. Even if there is agreement on the methodology, huge data problems remain that the FFC must explain how it would resolve. For example with education, the FFC approach would require data on the numbers of learners in different groups, income levels and rural/urban breakdowns. Such data is not easy to obtain - it is difficult enough to determine merely the total number of learners. In the area of health care, there are problems because some academic hospitals still do primary health care (since doctors think differently to narrow-minded economists and deliver health care as needed). There are other problems in health care because provinces are "naughty" in trying to devolve locally but still expecting funding for a provincial staff. So there are real difficulties on the ground in terms of even defining norms or even defining, for instance, different kinds of hospitals. No norms are currently available for costing.

Mr Momoniat explained that hard challenges remain even when the FFC answers these questions. There is a problem with having consistently tough or lax norms in different sectors, since this will affect funding levels. There is an affordability problem with tough norms and standards. There could be budget games where departments try to show higher cost levels, thus undermining the push toward efficiency. Today, there remain problems in hospitals with regard to theft.

The FFC proposals also raise concerns about provincial autonomy. Telling each province what to spend in each area risks weakening provincial autonomy and leading to a neglect of other provincial functions. There are also concerns about destabilising the entire budget process. The conclusion is that the FFC costed norms approach can be a useful analytical tool but is inapplicable in actual budgeting.

Mr Momoniat closed by referring briefly to a few intergovernmental budgeting challenges for the future:
- how to ensure that we are getting value for our money.
- the design of conditional grants - an urgent area for reform.
- the capacity to spend capital grants - the country needs infrastructure, but provincial governments seem incapable of spending on capital projects.

Discussion
The Chair asked about the data problems, how long they have existed, whether there are better mechanisms, and how they relate to international trends. There was also a question about data on population growth in townships.

Mr Momoniat explained that there cannot be nine separate institutions preparing data or they will cheat. Most countries in the world have a central statistical agency. His view is that it is necessary to prioritise what statistics we are going to collect. Statistics South Africa should be not just collecting data but also certifying data from other sources as arising from an appropriate methodology and seeming accurate.

Mr Durr (ACDP, Western Cape) asked for the FFC's reaction to National Treasury's response to its proposals. Mr Momoniat replied that there has been much engagement with the FFC. He expressed his view that the FFC does not propose costed norms as a budget allocation device but rather as best practice in terms of a budgeting tool, not methodology.

Mr Durr (ACDP, Western Cape) asked for clarity on how the current methodology of allocation works, whether it is based on statistics that are from the historical experience or from some other method. Mr Momoniat replied that the current formula's underlying methodology is based on relative demand for services. There might be more support among Education and Health departments for the FFC proposals if they think they will get more money, but Justice officials would not agree. It all depends where one sits. Where the National Treasury sits, it accepts costed norms as a possible tool but with serious problems.

Mr Lucas (ANC, Northern Cape) noted that the trend in the public hearings had been to support the FFC proposals. He commented that when the FFC and the National Treasury are supposed to work closely together but come to the Committee and disagree, it creates a very difficult situation for the Committee to determine what is really happening. He asked how the Committee is expected to deal with this inconsistency with the FFC and National Treasury saying radically different things. Dr Conroy (NNP, Gauteng) shared Mr Lucas's concern, saying he expected discussion between the FFC and the National Treasury before this meeting.

Mr Momoniat replied that the FFC feels strongly about the costed norms approach. The executive responds formally only at the time of the budget bill where the Ministry of Finance spells out what it is doing. He stated that nobody expects Parliament to be a referee. The FFC revised its initial proposals , but questions remain as to whether the FFC approach is even possible. The Treasury cannot model it because it requires many judgement calls.

Mr Lucas commented that it would have been helpful if Mr Momoniat had explained in a more practical way the dangers of the FFC proposal and how specific areas would suffer under it. He asked how the FFC proposals would affect the autonomy of the provinces - to which there was no specific answer. He also asked whether the National Treasury supports performance-based budgeting.

Mr Momoniat replied that there is a move to a performance-based budgeting analysis in relation to the vertical division but that "we are not there yet".

Mr Aulsebrook (DP, KwaZulu-Natal) stated that he had been under the impression that KwaZulu-Natal was supposed to be one of the provinces to benefit from the phase-in of the current equitable share formula. However, the presenter had mentioned that Gauteng, Western Cape, and KwaZulu-Natal were worse off. Mr Aulsebrook asked for an explanation.

Mr Momoniat replied that most poorer provinces have higher allocations and that next year, KwaZulu-Natal will move above the average. It has been below during the gradual phase-in. However, provinces like Gauteng and Western Cape will remain below the average because they are better off.

Mr Theron (DP, Gauteng) noted that the equitable share formula allocates only 8% based on the economic activity indicator and asked why this is. Mr Suka (ANC, Eastern Cape) asked for clarity on the issue of backlogs.

Mr Momoniat said that the issue is precisely why one is 8% and the other only 3%. This had been a judgement call when the formula was adopted as one needed to "avoid killing the goose that lays the golden egg yet also to deal with backlogs".

Mr Theron (DP, Gauteng) asked for an explanation of his comment that more health responsibilities are being devolved to local governments without their receiving more money for this.

Mr Momoniat replied that no local government should accept health responsibilities without a transfer of funds and stated that local governments must be militant. Provinces must be aware that they will lose funding, so they cannot continue to sit with health staffs.

Mr Suka commented on the issue of capacity to spend being an intergovernmental challenge and asked about training for better implementation.

Mr Momoniat replied that training is a big issue in South Africa. One of the big crises is that government departments do not have the capacity to spend money. We cannot build hospitals on time and properly with the money we have. Conditional grants escape oversight. What the Committee could do to help is ask departments why they are underspending, especially on capital projects.

Mr Makgatho (ANC, Eastern Cape) stated that he was worried about the costed norms approach being dismissed. He said that this dismissal left them nowhere with much unfinished.

Mr Momoniat reiterated that it was impossible to implement. He added that there are broader problems. Changing the formula will not change the vertical division. Merely having an underlying methodology will not solve matters. National norms and standards are needed to focus on outputs rather than on amounts of money or else it is input-driven yet again.

Mr Makgatho asked whether part of the problem of conditional grants was that money had been sent out very late.

Mr Momoniat suggested that most grants are flowing on time though this is a serious issue. He again referred to the problems of data and noted that eight of the nine provinces have been unable to provide information on child nutrition needs.

The Chair asked if they would see National Treasury's final response at the time of the next MTEF. She commented that the slide presentation had been tough to understand and asked if the Committee could get a written document.

Mr Momoniat replied that Treasury's response would be when it sets the next budget.
There is a document but it has to go to Cabinet and might become public by the time of the budget.

The Chair noted that there are many issues to go over and that the Committee would appreciate knowing if this document would be available so that it could table its report in the NCOP.

The Chair noted that the FFC had raised the issue of norms and standards being a government responsibility and asked for comment on this.

Mr Momoniat replied that the "devil is always in the detail" and that each department needs to be focused on. In education, the norm might be 35 pupils per teacher. These have to be worked out in conjunction with budgets and is a moving target.

The Chair stated that matters would be left as they were and that the Committee would finalise its report at the next meeting. She noted that some had not participated in the process and asked the Clerk for an update on this. The Clerk stated that SALGA's report on the FFC recommendations was not forthcoming. The Chair noted that the Committee can consider that SALGA has been non-responsive.

Abuja Treaty establishing the African Economic Community
Mr Short from the Foreign Affairs Department briefed the Committee on the Treaty. As South Africa became an OAU member only in 1994, it had had no input in devising the Treaty. Now, there has been some momentum to redesign aspects, with this gaining speed after the 1999 Algiers Summit. The Libya Summit agreed that there can be amendments to the Treaty. There has been a decision to establish an African Union and shorten the implementation of the Treaty Establishing the African Economic Community. As South Africa signed this Treaty on 10 October 1997, it can be part of the re-negotiation if it becomes a full member through ratification.

There are currently five regional economic communities (RECs) in Africa, including the Economic Community of West African States (ECOWAS) and the SADC organisation. The overall goal is to have an African Union by 2028. Stage I is involved with strengthening existing RECs and establishing new RECs. Stage II, over eight years, will involve tariff reductions and coordination and harmonisation. Stage III, over ten years, will involve the establishment of a free trade area and a customs-free zone in each REC. Stage IV, over two years, will be about the harmonisation of the RECs. Stage V, over five years, will consist of the establishment of an African common market and policies. Stage VI will consist of the establishment of a single African currency, the creation of an African central bank, and the institution of a pan-African Parliament. There will also be an African Court of Justice and other institutions to make the OAU a functioning community. Mr Short also explained that the Treaty establishing the African Economic Community defines a member state as a member of the community.

The Chair asked if the Committee would recommend that the NCOP approve the Treaty. Members agreed except the ACDP which asked to have its abstention noted.

Discussion of Upcoming Trip
The Chair explained that there had been problems finding out when the parliaments of India and Australia are in session thus preparations for the fourteen-day study tour were delayed. The budget will be in late February, so postponing the trip until next session would be impossible. The Chair indicated that five provinces would definitely go on the trip, mentioning both Gauteng and KwaZulu-Natal. Others might have to attend at their own cost. The trip should be workable after 5 December 2000.

Dr Conroy (NNP) asked whether it would not be possible to call the Indian and Australian ambassadors to find out about their parliamentary sessions. Alternatively, he suggested going to Germany only. Mr Theron (DP, Gauteng) asked why there was no information on India and Australia. The Clerk stated that there had been difficulties communicating with them via the Department of Foreign Affairs.

Mr Durr stated that it was unwise to go to all three countries. India is a complex place that would require more than three days. The Committee should do its homework and have a proper itinerary or it would waste its time. India is worth a meaningful visit and not a whistle-stop tour.

Mr Suka said that three days is enough for substantive learning if there are clear objectives and the Committee meets with relevant stakeholders.

The Chair stated her hope is that all members will go. Due to budget constraints, it is possible that only five will go (three ANC members and two opposition members) with members from Gauteng and KwaZulu-Natal going for sure.

Mr Durr (ACDP, Western Cape) stated that he and his party would not go on the trip if it was going to all three countries, as it would be a waste of public money.

Revenue Laws Amendment Bill
The Chair explained that the Committee had no power to amend this Bill. However, some issues would have a special effect on particular provinces such as Gauteng and the Western Cape. She asked that their provinces inform her by the end of the week if they wanted to offer input on the Bill's implication for the provinces. These issues needed to be raised on behalf of the provinces at a meeting on October 24 during constituency week for which the Committee had special permission to meet.

Timetable Issues
The Chair noted that the Minister will table the medium-term budget statement in the middle of October. She stated that there would be an information session on this on the 31 October. The Portfolio Committee on Finance will interact with the Minister of Finance on November 1. The Chair stated that she would like the NCOP plenary meeting on November 1 delayed so that Committee members could join with the Portfolio Committee in interacting with the Minister. She asked members to try to advocate for there to be this change.

The Chair thanked all for their participation and adjourned the meeting.

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