Draft Report on MTEF & FFC's Hearings; Study Tour & Strategic Planning Draft Document: discussion

Meeting report

FINANCE SELECT COMMITTEE
7 September 2000
REPORT ON HEARINGS ON FFC RECOMMENDATIONS ON MTEF, STUDY TOUR & STRATEGIC PLANNING DRAFT DOCUMENT: DISCUSSION

Documents Handed Out:
Report of the Select Committee on FFC Recommendations (See Appendix 1)
Draft Report on Strategic Planning Meeting of 09/05/00

SUMMARY
The draft report on the hearings of the Financial and Fiscal Commission Recommendations was adopted with amendments. Concerns highlighted in the report which were raised at the hearings held on the FFC Recommendations were:
- the need for National Treasury to also review the FFC Recommendations;
- the omission of recommendations on local government division of revenue;
- the omission of recommendations on the vertical division of revenue;
- the problems around programme-based budgeting for provinces;
- unfunded mandates not being sufficiently addressed;
- the integrity of the data to be used for the costed-norms approach;
- the Health component of the recommendations did not take into account the HIV/AIDS situation;
- the financial implications of moving towards the costed-norms approach was not presented.

Brief discussion occurred around the draft report on the strategic planning workshop held on 9 May this year. The committee will discuss the sections of the document in sub groups.

MINUTES
The Chairperson welcomed everyone present, and thanked members for the high turnout. She stated the hearings on the Financial and Fiscal Commission (FFC) Recommendations had been very productive and engendered many debates on the division of revenue. The Chairperson outlined the following as areas that the Select Committee were not entirely satisfied with, when engaging with the FFC:

Key concerns of the FFC Recommendations noted by the Committee
- The question of unfunded mandates was insufficiently addressed in the FFC Recommendations, and this was very unfortunate since this was one of the major obstacles facing provinces in the budgetary process.

- Programme-based budgeting also poses a problem for provinces since it is difficult to distinguish between necessary and unnecessary expenditures.

- The FFC Recommendations did not deal adequately with the issue of right sizing in the civil service, since right sizing could also lead to retrenchment and this would result in higher unemployment.

- The FFC Recommendations did not include any recommendations on the local government division of revenue, and the Committee saw this as a serious omission since local government plays an important role.

- The FFC Recommendations did not deal with the vertical division of revenue, and further did not clarify the impact of the horizontal division on the vertical division of revenue.

A key contention, which the Committee raised, was the integrity of the data.

The Committee also raised the concern that the Health component of the FFC Recommendations did not take into account the HIV/AIDS situation. Neither did they take into account the issue of home-based health care, and this would not effectively address the primary health care situation.

The FFC Recommendations did not deal with the financial implications of moving towards the costed-norms approach.

The committee felt that that the National Treasury should also express their view on the FFC Recommendations.

Discussion
Mr Marais (Free State, ANC) asked if he could retract the Free State submission that had been made during the hearings, since more discussion and consultation involving relevant role-players needed to be made.

Mr Durr (Western Cape, ACDP) also asked if he could do the same on behalf of the his province, since he needed to facilitate more discussion with the legislature.

Mr Aulsebrook (Kwazulu Natal, DP) said that his understanding of the FFC Recommendations was that the formula deals with the issue of unfunded mandates in its social service -component, and it does not deal with them in the Basic-component. This could cause further problems for provinces.

Mr Marais stated that budget formulation was the responsibility of politicians, and if the Select Committee was going to be so prescriptive with the FFC Recommendations, the committee needed to create a healthy balance between provincial prerogatives and national pre-emptives.

Mr Theron (Gauteng, DP) stated that provinces had a great responsibility to make sure that proper financial data and poverty statistics were kept, so that proper budgeting could take place.

The Chairperson urged provinces to monitor conditional grants more carefully since the provinces would bear the financial brunt if this was not carried out.

Dr Conroy (Gauteng, NNP) seconded the draft report read by the Chairperson.

Draft Report on Strategic Planning Meeting of 09/05/00
The Chairperson asked members for their view on the strategic planning document of the Select Committee.

Mr Taabe (Mpumalanga, ANC) confirmed that the document was a true reflection of what had been discussed.

Mr Aulsebrook felt that the current document is a discussion document, and does not lay down implementation strategies.

Mr Marais said that the document was divided into three components and he therefore felt it logical that the committee divide itself into three sub-committees

The Chairperson expressed the fact that she would not take part in any sub-committee since she would be playing a facilitative role in the process.

The Committee then divided itself, provisionally, into three groups.

The Chairperson urged all members to get one another's e-mail addresses since this would make communication between members of the Select Committee smoother.

Training of Members
The Chairperson noted that training (involving NGOs and the private sector) had taken place for members at the end of July at the Stellenbosch Business School. She stated that they were in the process of finalising overseas training courses for members, so it was important that members attend local training sessions organised by the Committee.

Study Tour
The Chairperson said that not every member would be able to go on the study tour (Germany: Dec 2000 or Jan 2001) due to financial constraints.

With all the items on the agenda discussed, the Chairperson adjourned the meeting.

Appendix 1:
Draft Report of the Select Committee on Finance on the Financial and Fiscal Commission Recommendations to the 2001 - 2004 MTEF Cycle.

The Select Committee on Finance, having considered and examined the Financial and Fiscal Commission Recommendations as at May 2000, referred to it, reports as follows:

Introduction
The Committee held public hearings on Monday 21 August and Wednesday 23 August, 2000, to consider the Commission's Report. The following stakeholders participated: the Financial & Fiscal Commission, IDASA, COSATU, Applied Fiscal Research Centre (AFReC), Foundation for Education, Science & Technology, School of Public management & Administration, University of Pretoria and the provincial finance standing committees (namely Northern Province, Free State, Gauteng, Eastern Cape, Northern Cape & Mpumalanga).

B Public hearings on recommendation by the Financial and Fiscal Commission on Monday 21 August 2000

1 Financial and Fiscal Commission
The Financial & Fiscal Commission makes three recommendations. The first is that provincial equitable share should provide for the constitutionally mandated basic social services and provinces should be held accountable for the delivery of the social services. Recommendation is not made on the total quantum of government allocation to the provinces but instead provinces should at least, provide a basic minimum allocation for the constitutionally mandated services. The Financial & Fiscal Commission focuses on the basic social services as set out in terms of the Bill of Rights. Education, primary health care and social security are the key components of basic social services. Although a large proportion of the budget is devoted to the provision of basic services, several controversial issues have developed that reduces the ability of provinces to meet the constitutional requirement of funding the basic level of services.

However, to meet this requirement the Financial & Fiscal Commission have applied their second recommendation, namely, the Cost of Norms Approach to the allocation of national revenues for the provision of constitutionally mandated basic social services.

The costed norms approach is a formula-based method for calculating the financial resources necessary for the provision of basic social service levels, given nationally mandated norms and standards. By starting with an estimate of the costs, each province would be required to meet a set of nationally determined minimum norms and standards for basic social service delivery. The objective is to ensure that each province has sufficient financial resources to provide constitutionally mandated basic social services to all its citizens. The norms and standards are chosen so that they are affordable within the national fiscal framework. While the Constitution stipulates that basic social services are to be provided to all citizens, it also specifies that provinces are responsible for the delivery of these services. Therefore, there is a need to express nationally mandated basic services in terms of norms and standards. Thereafter, these levels could be provided explicitly in government legislation or implicitly as a policy imperative. Then, the resources needed to deliver these social services are calculated by taking account of the structure of the provincial population.

The Financial & Fiscal Commission is mindful of the limitation of applying the costed norms approach to the equitable share formula. The non-availability of adequate data, the absence of defined policy targets and norms and standards, and the inability to cost with precision government functions such as foreign affairs and defense will diminish the usage of the costed norms approach in the short to medium.

In addition, the local government sphere is not given any consideration; this is largely in response to the Department of Finance recommendation that there should be a temporary moratorium on major changes to the local financing system.

The other recommendation by the Financial & Fiscal Commission relates to the formula itself. The commission recommends that the equitable share be divided into a constitutionally mandated social service (S) element, a Basic (B) Element and an Institutional (I) Element. The Social services caters only for those services that provinces have an obligation to deliver at a minimum in terms of constitutional or policy prescriptions, that is, basic education, primary health care and social security. Provinces ought to be held responsible for the provision of these services.
If a particular province feel that they would require more to meet their basic constitutional requirement, then they can negotiate between their S element and the B element in the formula. While on the other hand if provinces believe that they have met their basic constitutional requirement, then part of the S grant could go towards being used at their own discretion.

2 IDASA
The key issues raised by IDASA are as follows:

· Since national norms are not defined, will a sector be punished or obtain less resources simply because it has no clearly defined norms.
· The costed Norms Approach increases the likelihood that provinces will attempt to exclude `high-cost' population from basic social service delivery. As a result a province could be exposed to unfunded costs if `high-cost' people moved into its jurisdiction.
· The Financial and Fiscal Commission does not address the issue of whether Provinces have the capacity to spend the funds allocated.
· The Costed-Norms Approach could provide incentives to provinces to increase their costs in service delivery since this would give them access to additional funds in subsequent years. The Financial and Fiscal Commission propses to avoid this problem by only taking account of unavoidable costs. Inefficient and wasteful expenditure would not therefore be a basis for provinces to obtain additional funds. However, the difficulty is how to maintain a continuous distinction between avoidable and unavoidable costs during allocation.
· While the Department of Finance allocates the welfare component on the basis of the need of recipients of three grants, the FFC takes six grants into account. This refinement allows a more accurate distribution of revenue. The Foster Care grant in the calculation of the welfare component is to be commended since the demand for this grant is likely to increase commensurate with the increase in HIV/AIDS - related deaths. As a result the Financial and Fiscal Commission's proposal would reflect new demands on provincial service delivery. Similarly, IDASA supports the Financial and Fiscal Commission suggestion to distribute education resources according to nine different learner groups. Each group will have its own needs and cost implications.
· Although the Financial and Fiscal Commission recommends that the existing backlog and economic activity components be consolidated into one basic component that would fund all remaining social and non-social services. No sustainable explanations are forwarded to support the removal of the economic component. Instead IDASA argues that the economic activity share should be retained in order to fund provinces for the costs of economic growth. Provinces that have the capacity to support national growth and provide employment should be supported while provinces that do not have capacity should not be prevented from developing.
· IDASA also support the proposal that 5% must be added to the total amount allocated to each province's administration costs in provincial social security.

3 AFReC (Applied Fiscal research Centre)
AFReC acknowledges the following:

· The MTEF is a major innovation in the budget process.
· Budget process has become more transparent in recent years facilitating planning in government

However, AFReC argues that the MTEF does necessarily guarantee improved service delivery and/or flow of information. Improvements on the present achievements will need to be made to keep up with changing circumstances and needs. In this light, AFReC recommends the following:

· The MTEF should include information on costs of existing projects and those associated with policy changes or introduction of new programmes
· Departments should compile detailed information on cost drivers and base their MTEF figures on those and policy changes to avoid reverting to incremental budgeting with a three year horizon
· Improve prioritisation and trade-off analysis ABX budgeting should be adopted across national departments
· The Financial and Fiscal Commission's costed norms approach should not be implemented unless and until sufficient information is available to support its fruitful application. AFReC argues that since information is not easily available and the cost of research to obtain such information is very high, usage of proxies may be necessary. In which case, the Financial and Fiscal Commission formula may not be an improvement on the existing one. Moreover, AFReC argues that there may be for good political reasons not to define minimum national norms for service provisions. Government may not find it politically expedient to unambiguously establish minimum norms and standard for service delivery.

Foundation for Education, Science and Technology
The Foundation called for increase spending on research and development in relation to the South Africa's GDP. South Africa's investment in research and development is minuscule when compared with international best practiced. Moreover, the Foundation argued that the MTEF does not monitor expenditure on research and Development.

5 School of Public Management and Administration, University of Pretoria: Prof Jerry Kuye
Advocates a move towards sequential biennial approach with checks for the introduction of mid term budget review cycles. This type of budget allows for far more interventions in mid term, growth, planning and development.

Provincial Standing Committees on Finance
· Gauteng believes that the costed norms approach does not replace sound planning and robust budgeting instead it is an instrument to assist in these processes and complements the political decision-making process. The costed norms approach is not necessarily prescriptive but work within the principle of the progressive realisation of basic rights and acknowledgment of norms and standards. Gauteng reminds us that it is fallacy to single out this approach as a miracle instrument. The costed norms approach could be seen as a long-term goal and its flexible nature allows it to accommodate provincial differences.
· The Northern Cape argues that its actual cost of social services is higher. The costed norms approach could make available more resources for that services. The Northern Cape also indicate that National government may want to limit overall available resources. In addition, since the costed norms approach employ ruralness as a key yardstick of measuring poverty, this may not favour the Northern Cape because it is regarded as largely urban.
· The Free State argues that the Financial and Fiscal Commission is well placed to determine the number of individuals eligible for Social Security grants. It also argues that the Commission does not incorporate adult basic education and early childhood education although providing such services is an extension of Human Rights. The Free State also calls for the inclusion of vastness of areas (geographical) in the formula since it increases the cost of social service delivery.
· The Eastern Cape argues that the timing of the proposals are inappropriate because of a lack of data. Stats SA may not be well placed to provide appropriate data.. The welfare-costed norms of the Commission may be at loggerhead with the National Welfare Department, which is considering revamping the definition of recipients of social welfare to include extended families. The province also argues that it is still unclear whether primary health care is a provincial or local government competency. This component of basic service is difficult to cost.
· The Northern Provinces argued that since it share a border with other Southern African states, they are adversely affected by illegal immigrants who may require additional resources in respect of education and primary health care. The presence of illegal immigrants needs to be in-corporated in the Financial and Fiscal formula.
· Mpumalanga argued that the movements of senior citizens across provincial boundaries militate against them. Senior citizens retiring in rural areas may not be recorded in official statistics. Such movement of people needs to be included in the Commission's formula. A concern was also raised that the removal of conditional grant from the formula may reduce their health budget substantially. Mpumalanga also called for the review of the payments system of conditional grant. It argued that the recipient of conditional may not be aware that such payment have been forwarded to them. They also alleged, that the phase-in period whereby the better-off provinces receive smaller allocations, while the worse-off provinces receive more, is halted.

7 COSATU
The labour federation endorses the Financial and Fiscal Commission's proposals with qualification. COSATU agrees with the following:
· fiscal policy needs to start with identifying acceptable norms and standards and thereafter needs quantifying of the fiscal resources required to fund these;
· the present system has degenerated into a projection of annual budget but argue that the Financial and Fiscal Commission should relate only to major projects and strategies, leaving other routine activities to annual budgets'
· the costed-norms approach may be at conflict with current macroeconomic parameters. Cosatu has again aggressively called for the expansion of the macroeconomic parameters with regard to the budget deficit .

8. Recommendations
In the past, both COSATU and the provinces, have voiced the opinion that allocation to provinces and the line departments are insufficient to provide the minimum levels of basic social services. COSATU often argues that this is the result of determination of financial resources on the basis of meeting macroeconomic objectives as opposed to any reference to actual resource requirements. In this light, the select Committee of Finance should hold a public hearing on `The implication of expanding budget deficit for the provision of basic services'.

Since the committee is aware that the present quality of data in the provinces is poor, implementation of this information-intensive approach to horizontal equitable shares, known as Norms-Costed Approach, is doubtful, at least in the short to medium term. Therefore, the Select Committee of Finance needs to interact with Stats SA and the various National Department with a view to devise ways of improving financial data at provincial level. The Committee also notes that this was also a concern of the IMF during their last briefing to this Committee.

Thirdly, the Select Committee of Finance could request the Financial and Fiscal Commission to investigate to what extent the `iterative process' may end up substantially similar to the existing budgetary allocation. The `iterative process' refers to the alignment of the norms and standard approach with the MTEF. The result of this study will reveal the validity of the costed-norms approach.

Fourthly, The Select Committee of Finance should approach both the National Treasury and the Financial and Fiscal Commission to investigate the political implication of establishing norms and standards in the provision of basic services. The absence of a political will to define targets will alone determine the feasibility of the norms-costed approach to budgeting.

9 Conclusion
The Select Committee on Finance congratulates the Financial and Fiscal Commission on changing our mindset to the budgeting process. The Committee is mindful of the obstacles to an immediate adoption of the proposals of the Financial and Fiscal Commission but argue that such approach will have more relevance in the longer term. However, the Select Committee should, in the interim period, actively intervene in the process of data enhancement.