Provincial Feedback on FFC's Recommendations

Meeting report

FINANCE SELECT COMMITTEE
21 August 2000
PROVINCIAL FEEDBACK ON THE FFC RECOMMENDATIONS

Documents Handed Out:
Financial & Fiscal Commission Recommendations: 2001 - 2004 MTEF Cycle
[e-mail [email protected] if this document takes too long to download]
IDASA Submission on the FFC's recommendations
Northern Cape Assessment of the costed-norms approach (Appendix 1)
Free State Assessment of the costed-norms approach (Appendix 2)
Eastern Cape Assessment of the costed-norms approach (Appendix 3)
Gauteng Assessment of the costed-norms approach (Appendix 4)

Late written input from provinces:
Mpumalanga
Northern Province

SUMMARY:
The Financial & Fiscal Commission briefly outlined the costed-norms approach to the Select Committee, pointing out that much laborious effort had gone into preparing the document including a very extensive consultation process. The Select Committee generally found no major problems with the costed norms approach, the general concern being one of wanting to know the difference between the existing equitable share formula and the costed norms approach.

IDASA praised the FFC for their outstanding effort in preparing a document which focused to a large extent on equitable sharing. They appreciated the relevance of the FFC's recommendations, but were unhappy about the lack of clarity in the implementation process and the lack of norms and standards.

With regard to Education, they commended the FFC on grouping learners according to resource needs. IDASA supported the FFC in proposing that poverty is a better utilisation indicator than medical aid for the Health component.

The Northern Cape, Eastern Cape, Gauteng, and the Free State made a brief input. The remaining provinces did not have an input but promised the Committee that they would make a document available within the week.

The provinces highlighted what they regarded as potential problem areas in respect of the costed norms approach. In spite of the problems highlighted the provinces noted that the approach was ''theoretically good'' and that it acknowledged that ''the current equitable share formula needs to be enhanced''.

MINUTES:
Financial and Fiscal Commission presentation on its recommendations
Mr Jaya Josie, Deputy Chairperson, outlined the key role of the FFC in the Medium term Expenditure Framework (MTEF) cycle. He further emphasised the constitutional mandate of the FFC and the need for the FFC's proposals to be considered. He pointed out that the FFC had focused on the equitable share in the area of the horizontal division of revenue.

Summary of Final Recommendations
- The costed norms approach in essence provides government with parameters in dealing with the division of revenue.
- The costed norms approach is there to improve upon the incremental budgeting approach being currently used
- The emphasis of the approach is on norms and standards and how these can be reconciled with the budgetary process

Mr Josie explained that international best practices had been applied in preparing the costed norms approach, and this is reflected in the different elements present in the formula, such as the institutional and basic element.

Education:
Learners have been categorized into 9 types. Differences in resource needs according to learners in provinces will mean that resources are allocated accordingly.

Health:
Primary health care services have been calculated per capita, with emphasis on women and the elderly

Welfare:
The FFC proposes that the Institutional element be lowered in order to release funds for other constitutional mandates. It also proposed that a relatively lower poverty weighting be implemented for the Basic element.

Mr Josie outlined that the Conditional Grant for Capital Backlogs caters for inherited social backlogs and for on-going backlogs. He said that the FFC consultation process had included the MinMec, Portfolio and Select Committees, Head of Departments, Executive Councils of Provinces and civil society through workshops.

Implementation Issues
Mr Josie said that the major concerns had been about data availability and the FFC, by developing a formula which is data intensive, had in fact created a demand for better data. Another concern had been the absence of official norms and standards, since these were still in the process of being drawn up. He pointed out that the goal of the costed norms approach is to provide a viewpoint on levels of norms and standards which should be achievable given the available resources.

Conclusion
Mr Josie said that the FFC Recommendations had engendered constructive and substantive debate on the equitable share formula. He said that the costed norms approach facilitates transparency and can be implemented side by side with the current formula being used the Department of Finance.

Discussion
The Chaiperson asked if the costed norms approach was suitable and viable for a developing country like South Africa.

Mr Josie replied that the costed norms approach is more compatible to use in a developing country since there is room for trial and error.

Mr Aulsebrook (DP) asked if the MinMec had changed their mind, since initially they had virtually rejected the recommendations of the FFC

Mr Josie replied that initially the MinMec had rejected the FFC's proposals because it felt that the FFC wanted to push them out of their comfort zone. Mr Josie explained that the FFC approach was very modest, with no intrinsic opposition to the current formula. He said that the function of the FFC is to disaggregate given resources equitably.

Mr Makgatho (ANC) expressed his concern about the grey area surrounding data availability. He asked if the insufficient data was a problem on the part of the Department of Finance or on the part of the FFC

Mr Josie explained that the FFC had used data supplied by Statistics SA, Department of Finance and various other population data sources. He stressed that the FFC data requirements are mainly population related and the different levels of government (national, provincial, local) require different data sets.

The Chairperson acknowledged that thorough research had gone into the preparation of the FFC recommendations. She asked what had caused the FFC to diverge from the existing formula

Mr Josie replied that over the past, the FFC's recommendations had dealt with the quantum approach. This year the FFC had sought to focus on the disaggregating approach which dealt with issues at a grassroots level. He also added that various provincial Health and Welfare departments had approached the FFC to assist them in drawing up efficient ways to administer their budgets. He said that the flexibility of the costed norms approach lies in the fact that the FFC can engage with Parliament on how equitable shares can be afforded.

Mr Makgatho (ANC) asked whether the impact of HIV/AIDS had been factored into the formula

Mr Khumalo (FFC) explained that AIDS had been considered for factoring into the equation as part of the utilisation component. However, he pointed out that the costed norms approach is a revenue sharing formula, and since HIV/AIDS cuts across all sectors of government, it needs special attention at a national level. Including AIDS into the formula would create a problem as to how other diseases receive necessary attention.

Ms Botha (ANC) asked if the Northern Cape Executive Council had been consulted during the consultation process

Mr Josie said that a meeting is scheduled with the Northern Cape Executive Council for the 27 September.

The Chairperson asked whether the current formula should be applied with regard to local government, since no recommendations had been made by the FFC with regard to local government

Dr Fast replied that the demarcation process will have a significant impact on local government, but applying the existing formula to the new boundaries will create problems in terms of the institutional grant.

The Chairperson asked about the FFC's recommendations with regard to the vertical division of revenue

Mr Josie said that with regards to the vertical division of revenue, the FFC had made a fundamental recommendation as early as 1996 on principle: they suggested that more and more allocations should move toward provinces. He explained that on this set of the MTEF cycle, the FFC had focused on empowering provinces to fulfil their constitutional mandates. He added that it would be useful for the NCOP to offer the FFC protocol guidelines to engage in effective dialogue with provinces.

The Chairperson concluded by thanking the FFC for their recommendations and the effort put into preparing them.

IDASA Submission on the FFC Recommendations
Mr Russel Wildeman stated that the current formula being used by the Department of Finance was based on historical expenditure patterns, and the costed norms approach was better in that it was detailed in dealing with sizes of the components, namely the institutional and basic elements. His problem with the costed norms approach was the lack of clear norms and standards, thereby raising concerns about the validity of the approach.

With regards to the Education component, Mr Wildeman said that the current formula is one of access: its focus is to facilitate access in primary and secondary schooling. He pointed out that the current formula was also efficiency-oriented. He outlined the pivotal point of distinction between the FFC formula and the current formula, as the classification of learners into urban and rural learners, and also according to their income status. He added that the FFC should be commended on grouping learners according to resource needs.

With regards to the Health component, Mr Wildeman stated that in the current formula people without medical aid are weighted four times higher than people with medical aid. He said that IDASA supported the FFC in proposing that poverty is a better utilisation indicator than medical aid.

He said that IDASA had a problem with the FFC's proposal that the basic and backlog components be combined. He said that it would be very difficult to pick up components other than social services components, if this were to be the case. He also cited the fact that there was no evidence of the clearing up of present backlogs in the education and health sector. He therefore suggested that the basic element remain as a single component since it aims to look at backlogs in poorer provinces. He also suggested that the Economic Activity Component remain separate, since it is there to sustain economically active provinces and in a sense bringing up poorer performing provinces to a basic performance standard.

Discussion
Dr Conroy (NNP) asked for the FFC's reaction to IDASA's input

Mr Josie replied that IDASA had worked with the FFC on Project 2001, and both the Department of Finance and IDASA had recognised the value inherent in the costed-norms approach. He stated the FFC's differences with IDASA were of a technical nature. He pointed out that the presence of an Economic Activity Component did not seem to make a substantial difference in the past, and hence had not been given a separate component in the costed norms approach.

Mr Wildeman asked the FFC to explain the absence of any provision towards Adult Basic Education and Training in the costed norms approach

Mr Khumalo replied that the Early Child Development and Adult Basic Education and Training components had been left out of the education formula since they constituted a separate part of education and needed to be clarified further by the Department of Education

Mr van Zyl commented that the FFC approach was incentivised towards an increase in spending, since they had made no clear distinction between avoidable and unavoidable costs. However, he added that the costed norms approach was distinct from the Department of Finance's in that it proposed how the distribution of resources was to be effected

Mr Makgatho(ANC) asked whether the backlog component included ruralness.

Mr van Zyl responded by saying that IDASA in fact had proposed that ruralness weighting be re-introduced into the backlog component

Ms Botha (ANC) followed up on the question by asking if the FFC had changed their definition of ruralness

Dr Fast explained that the FFC did not define what rural meant, but that the meaning was derived from Stats SA

(Afternoon session)
Provincial input on FFC recommendations
The following provinces gave input on the FFC recommendations:
Northern Cape, Eastern Cape, Gauteng and Free State (see Appendices 1 - 4).
[Western Cape and North West were not present; Kwazulu Natal, Northern Province and Mpumalanga promised that their input would be made available to the Committee within the week.].

FFC's response to issues raised by the provinces
Mr Josie said that he was pleased to see that the provinces had taken the FFC's recommendations seriously. The FFC had engaged the Budget Council via the MECs and they will engage further with the provinces.

The Northern Cape had said in their presentation that they are regarded as an urban province and not a rural province. This does not work in their favour. The FFC responded to this by saying that the costed norms approach is not targeting provinces but it is targeting population groups. The question that one must ask is how '' ruralness'' is measured. Is Stats SA's definition of ''ruralness'' acceptable?

Mr Sinclair (of the Northern Cape provincial government) said that there is a perception that the Northern Cape has the second richest household per capita income. On the ground level however this is simply not the case. The problem is that they must redefine and re-approach the political jargon in respect of the definition of rural. Ms Botha (also of the Northern Cape provincial government) agreed that they must discuss the definition of rural and decide what rural is.

Mr Josie agreed saying that they are trying to find a clearer definition of poverty.

The Eastern Cape had contended that the data used by the FFC is not made available to the provincial treasury, saying that the data was kept ''secret''. Mr Josie's response to this was that the Eastern Cape is confused about the data issue as there is no secret data. The data they used is readily available. The FFC is going to the Eastern Cape and they will engage with them on this issue.

The delegate from the Eastern Cape replied that he was aware that they have open data but what he meant was that there is not enough analysis of the data to make an informed decision.

The Eastern Cape also said that expectations could be raised in respect of an overall increase in the allocation of Welfare. The FFC replied that this would depend on the norms of the Welfare Department. In any event the number received by them (as a result of the costed norms approach) was lower than the current allocation. Therefore they are lowering expectations rather than raising them.

Further the FFC formula does not deal with a quantum approach, therefore no FFC formula can raise expectations. The formula addresses disaggregation.

The Eastern Cape also raised a concern about inaccurate data. Mr Josie agreed with the relative inaccuracy of the data but noted that the Stats SA data is the only available data. He added that compared to many countries the SA data is ''not that bad''.

The Eastern Cape said that data on disability incidence is not available. Expectations may be raised in respect of the disability allocations. The FFC replied that the expectations are created by the Constitution which provides that people are entitled to social security rights. There has been a crisis in social security provision for the past few years and it was uncertain whether the provinces were getting the right amount. The Finance Department says that the costed norms approach will help this situation.

Another concern raised was that it is still undecided whether the primary health care component is a provincial or a local function. As long as this uncertainty remains it will be difficult to cost this component appropriately. The FFC replied that the current arrangement is not ideal. Local government provides health care but they get their money from provinces. It will be a problem.

The Chairperson asked the FFC to comment on cross-border migration.
They replied that the costed norms approach will show how many people should be in a province receiving a grant. It will make it easier to estimate the movement of people from one province to another.

A Mpumalanga delegate asked how they should deal with the problem of immigrants.
The FFC said that the question was whether illegal immigrants were under the control of local or provincial government. The problem is beyond the control of provincial governments. Must national government control the situation? It is an administrative problem that they can control in the future. It is not a management problem. Therefore it is not included in the formula. On a practical level the provinces have to deal with these people. Services must be provided to them. How do national and provincial governments deal with these people. National government has a responsibility to control the borders and keep out illegal immigrants. They cannot build this into the formula.

On migration Mr Josie said that if the committee and the NCOP felt that migration had a serious effect on the provinces then they could request the FFC to conduct research to see the impact of cross border migration on the equitable share. They can look at the impact on local and provincial government. The FFC will then make specific recommendations on this.

The remaining provinces did not have an input and promised the Chairperson that they would be made available to the Committee within the week.

Appendix 1
Northern Cape: Assessment
1.Theoretically document is good
Seems favourable for the Northern Cape
e.g. Real cost of Social Services higher in Northern Cape
if actual cost is taken ... then we may get more for that service (and not from other services)
(eg teacher-pupil ratio not achievable in Northern Cape)

2. Potential problem areas
(l) Actual figures not given so difficult to assess impact on us
(ii) The suggested increased cost (R15 billion) may result in non acceptance by National (who may want to limit overall available resources)
(iii) Other provinces may not gain so many oppose approach
(iv) Formula relies on accuracy of data (so potential for dispute high). 'Also definition of poverty is problem (Northern Cape seen as high income province)
Northern Cape regarded as Urban (not rural) works against us.
- Northern Cape problem is Welfare: our norm is higher than other provinces. Question is it actual cast or is there waste. Answer to this will determine whether we gain or lose (e.g. our disabilIties high due to mining; asbestosis etc)
(v) Provinces might be "encouraged" to be inefficient (to show a higher cost of service) So as to get more resources.
(vi) Issue of Local Government Share (will influence available resources)

3. Possible Approaches
(a) Support introduction of FFC recommendation (still need clarity of impact in actual money terms and impact of welfare)
(b) Look at implementing component parts of formula (e.g, Welfare where statistics are clear)
(c) Argue for review of vertical division (i.e. less for national more for provinces)

Other Points of interest
1. FFC takes into account allocation to votes (81%) but actual overspending pushes cost of service higher (87%)
2. Where is the problem? Identify and fix It?.,. Welfare?

Appendix 2
FREE STATE PROVINCE
COMMENTS AND RECOMMENDATIONS ON FINANCIAL AND FISCAL COMMISSION FOR 2001-2004 MTEF CYCLE
1 The purpose of this report is to make comments to your latest recommendations in regard to costed norms approach elucidated in your report dated May 2000.
2. Among the critical norms of the applicable to the Intergovernmental Fiscal Relations system there is also greater emphasis on ''equity'' in relation to the National division of revenue among all nine provinces. Indeed, it is an acknowledged fact that the democratic government has inherited huge disparities, both vertically at the different levels of government, as well as horizontally among province and localities. Against this background the equity norm seeks to redress some of those imbalances by providing for corrective transfer or grants.
It is imperative and encouraging noting that the commission puts more emphasis on the Constitutional requirement, which specifies that the provinces carry responsibility for delivery of basic social services. We have no doubt that your recommendations will go all the way to ensure fair and equitable sharing of national revenue.
3 To ensure that the commission succeed in its effort to address the constitution requirement mentioned in paragraph two (2) supra, the Free State Provincial Government has adjusted its base-line budget as an endeavor to ensure that our total expenditure on these constitutIonally mandated services constitutes 84,6 per cent of the total provincial expenditure. which is closer to 85 per cent thumb rule. Although it is difficult to adhere to this guideline, more especially to a rural and poverty-stricken province like Free State, all efforts are made to adhere to this rule.
4. We have noted with interest the revision of cost indicator for primary health care, which has been increased by 30 per cent. We have no doubt that this increase will enable the provinces to begin to address the problem at primary health care more aggressively.
5. It Is our opinion that for the Commission to be In a position to determine the number of individuals eligible for Social Security grants, the process of re-registration by all the provinces has to be completed as a matter of urgency. In our province this process has yielded positive results₁ although the process is not yet 100% completed.
6. With regard to child support grant, our take up rate was slower than anticipated in the previous financial year, however, we are confident that this process will accelerate in the current financial year.
7. Although the commission recognizes that concentrations of poverty result in additional responsibilities for provincial government, it is our opinion that the function of poverty relief is scattered all over the National departments, and funds flow to the provinces and transitional local councils in a form of conditional grants. It is our recommendation that those funds be included in the provinces equitable shares to enable the provinces to channel these resources in projects, which are in line with the provincial priorities.
8. As IDASA said in their presentation, I share same sentiments to have noted with concern thai the Commission's education formula does not address adult basic education and early childhood education, despite the fact that these programs are regarded by the Constitution as basic rights. It is our opinion that to enforce the provinces to recognize these basic rights and to ensure literacy in our society this must be included In the FFC formula.
9. The formula adopted has to take into consideration situational differences among provinces. The question is to ensure equity; impartially where there is greater level of diversity. When it comes to Rigid determination and application of distributive formula, the example in geographical factors will be the implication of allocation based on the size of the population could be unfavourable to mainly rural areas. For example, provinces such as Free State that are mainly may not have as bigger a population compared to relatively urban areas, however the vastness of areas geographical poses an even more daunting a challenge in terms of social service delivery₁ thereby justifies for budget allocation.
10. The review of other expenditures in the provinces has revealed that very little is left for economic development in provincial expenditure budgets. It is recommended that the Commission seek mechanisms, which will give a fair balance of economic development and social upliftment of our people.
11. The Free State Provincial Government supports the Commission's recommendations in regard to 2001- 2004 medium Term Expenditure Framework Cycle.
12. However as required by the FFC, our province will forward a detailed written recommendations, as this was a draft based on the time frame to present this to the Select Committee. WE also would like to Invite the FFC to our Portfolio committee on Finance to help in taking informed decisions.

Appendix 3
EASTERN CAPE RESPONSE TO FFC COSTED NORMS FORMULA
POSITIVE:
The effort by FFC does keep alive the argument that current equitable share formula needs to be enhanced. in order to address relatively undeveloped provinces with problems like ruralness, high incidences of poverty, various diseases etc.
NEGATIVES:
- Timing for implementation as 2001 Budget is problematic
- data used to arrive at their conclusion has not been made available to any Provincial Treasury
- Apparently it is a kept secret, so nobody can objectively engage it,

On the expenditure side:
- One has a concern that it can easily raise high expectation on overall increase in the allocation of Welfare.
- Impact of HIV/Aids on home-based care in the event of a full-blown Aids is not taken into account. It seem the formula once more makes the mistake that HIV/Aids is a health matter.
- Data on disability incidence is not available, therefore may further raise expectation amongst permanent versus temporal disabled.
- Stats SA data is not perfect both formulas rely on it. Remember:
The institution is still undergoing extensive change and may not right now have the capacity to provide appropriate data.
Therefore with all these many variable, why move into a new formula without known facts.
- With all the raised expectations for the country on Welfare in particular because Education and Primary Health Care components are not ready yet. How will these be funded? There is no
suggestion.

OTHER COMMENTS:
1. The Welfare costed norms approach is based an the current definition of beneficiaries for each of the six separate Social Security programmes, whilst on the other hand the National Welfare Department, through the Ministers pronouncements is considering to revamp the concept of beneficiaries, to include extended families.

2. With regard to Primary Health Care component, the problem of whether PHC should be a provincial or local function still lingers, until such a political issue is resolved. This component will be difficult to be costed appropriately.

Appendix 4
GAUTENG FINANCE AND ECONOMIC AFFAIRS STANDING COMMITTEE
comments on costed norms approach of Financial and Fiscal Commission's Input
1.The FFC was created by the Constitution as a countervailing check and balance on the executive. As such it is a potential source of impartial advice and analysis. The Constitution requires that the FFC submit its recommendations for the Division of Revenue among the three spheres of government for each fiscal year. The recommendations put forward were developed within the parameters of the MTEF and mark a further advance on the development of a robust intergovernmental fiscal system.

2. The use of a formula for the equitable allocation of financial resources between provinces is not new only the formula itself is different. The principle, which informs the equitable allocation horizontally to enable provinces to provide the constitutionally mandated basic social services to resident citizens, is also not new. What is new is the actual formula.

3. For some years now provinces have pointed out the problem of unfunded mandates. The Department of Finance has also tried to address this problem. Gauteng accepts that just as the Department of Finance has insisted that all legislation must consider the financial implications of the implementation of such legislation so too should the budget, which is also a piece of legislation, meet this requirement.

4. 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. As such the approach cannot simply be imposed but is rather part of the harmonisation of medium term budgeting to provide basic services and promote economic development and growth in all provinces.

5. In this way economic disparities between provinces can be addressed more progressively and democratically than through conditional grants. Of course this would then place the obligation of meeting constitutional obligations more squarely on provinces who could not longer blame national for the co-called problem of unfunded mandates.

6. However the costed norms approach also assumes that provinces will indeed implement allocative efficiency within the parameters of prioritising basic social services. This also assumes effective financial management in all spheres of provincial government.

7. The costed norms approach also informs the vertical division of revenue between the three spheres of government. Just one of the issues here is the capacitation of the respective spheres of government.

8. Linked to this is the issue of redistribution in favour of the economically impoverished. This is more likely to achieve its objectives through a central allocative sphere than when it is introduced by a sub-national sphere as there is a tendency to drive high-income earners out of the respective jurisdiction for example from one province to another. However lower sphere governments may have more information about the priorities and needs of their citizens and be more informed about region-specific conditions and costs than the central sphere. This could lead to more improved programme design and service delivery.

9. The costed norms approach underpins bench-marking in the provision of services which contributes to performance budgeting and in turn to more effective delivery and greater accountability of resources.

10. The costed norms approach is not necessarily prescriptive but works within the principle of the progressive realisation of basic rights and acknowledgement of norms and standards in this regard. This would also promote greater transparency.

11. As provinces recognise the need for more efficient and effective budget planning the need for a more effective method of costing is a critical component of value-for money delivery and meeting basic needs. There is less fudging of figures. The move towards programme budgeting would also benefit of the costed norms approach.

12. However it would be a fallacy to single out this approach as a miracle instrument. Just as we are not employing only a zero-based budgeting system, or only a performance based budget system or only a programmed based budget system but rather a combination of the advantages of each of these systems so too the costed norms approach can be used judiciously. In this way it can contribute to more realistic budgeting to achieve prioritised policy, stated outcomes and targeted outputs while meeting constitutional obligations.

13. The costed norms approach could be seen as a long-term goal. It certainly is constructive to pilot it against the larger votes. Even if it is only used as an alternative financial indicator for comparison purposes. Its flexible nature allows it to accommodate provincial differences. It promotes efficiency by recognising the opportunity costs of reallocating resources. Through stripping down service costs, it exposes financial management inefficiencies. It complements performance management and can also enhance programme budgeting. It also promotes provincial fiscal maturity rather than the central sphere of government having to rely on conditional grants to ensure prioritised essential expenditure.

14. Gauteng recognises that norms and standards are essentially a political process and that the costed norms approach is merely an financial instrument. However it is an instrument that can give greater effect to the MTEF and simultaneously address the vertical and horizontal division of revenue. It can also be used in the provincial budgeting process. To some degree Gauteng has been using the principles of such an approach which has contributed to a fiscally and socially balanced budget.

Prepared by Joan Fubbs from the Finance and Economic Affairs committee's deliberations on the presentations of the FFC 18 August 2000