Financial and Fiscal Commission Submission on Division of Revenue 2010/11

Standing Committee on Appropriations

09 July 2009
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) reviewed the Constitutional arrangement governing the FFC, specifically its structure and consultation process. The FFC reported that its new five-year strategic plan was heavily influenced by the challenges it had identified. These challenges included resolving the matter of powers and functions across the three spheres of government, fiscal capacity of provinces and municipalities, and the impact of transfers on the delivery outcomes of government programmes.

The detailed recommendations for consideration in the development of the Division of Revenue Bill for 2010/11 covered the review of the provincial equitable share (PES) formula, the efficiency and effects that expansion of the social grant system would give, and the management and maintenance of public infrastructure. The FFC made particular recommendations for the improved performance of public hospitals, rental housing and the management and financing of roads infrastructure. It also discussed the assessment of access to water and sanitation, according to an evaluation of progress made on achieving targets, and made recommendations to address the areas of concern in the provision of these services. Institutional and fiscal capacity support mechanisms for local government were discussed, and recommendations for improving local government capacity were made.

The members asked questions in four broad categories according to the recommendations presented the FFC. In respect of housing, their questions concerned the reasons for disinvestment in social housing, what was meant by designated restructuring zones, the qualifying income band, the use of the Development Facilitation Act (DFA), and whether the new Department of Human Settlements was also to look at the integrated issues around housing, such as water and sanitation. The FFC was questioned about its recommendations on water and sanitation, on the trade-offs it had highlighted around the setting of water tariffs, the indigent policy on water provision, the problems frustrating water provision where communities were close to dams, the testing of water quality, and partnership with NGOs in the exploration of alternative water provision methods such as rainwater harvesting. Members asked what was currently happening with water quality, and why there was a recommendation to establish a National Water Regulator, as also the relationship between the Department of Water and Environmental Affairs, who was currently regulating, and the Council for Scientific and Industrial Research. Members also asked if South Africa was close to meeting the Millennium Development Goals on water and sanitation, what the realistic threat of South Africa experiencing a water shortage was, and the rationale used in the extension of the target date for universal water provision. In respect of the recommendations on social spending, Members queried the extent of misuse of childcare grants, why grants were often used in countries where State systems failed, and whether the FFC recommended that the social grants should be linked to the Expanded Public Works Programme. The Committee felt that it was important to cap dependency on social grants, and asked how this could be done.

In respect of the FFC’s recommendations on local government, the capacity building suggestions for municipalities elicited comments from Members on the high use of consultants in municipalities, and the internal collection of revenue being a factor informing the lower national support to local government. Members also enquired what an equalisation grant entailed, the reasons for the recommendation to standardise hospital budgets, who would receive these recommendations, and sought further explanation on the graphs used in the presentation. Members agreed that the FFC should return for further engagement, and that the Committee would now need to engage with departments.

Meeting report

Financial and Fiscal Commission: Submissions on Division of Revenue 2010/2011
The Chairperson noted that the majority of members were unable to attend due to the beginning of the Parliamentary recess, and suggested that the Financial and Fiscal Commission (FFC) return in early August for a more robust engagement with all the members of the Committee.

Dr Bethuel Setai, Chairperson, FFC briefly informed the Committee about the Constitutional arrangements governing the FFC, as contained in Section 220, specifically its structure and consultation process.

The FFC’s new five-year Strategic Plan was heavily influenced by the challenges identified. In particular these included the need to resolve the matter of powers and functions across the three spheres of government, the fiscal capacity of provinces and municipalities and the impact of transfers on the delivery outcomes of government programmes. The FFC recommendations were an integral part of the Division of Revenue Bill (DORB) and Budget of the following fiscal year.

Dr Setai then moved to the submission on the Division of Revenue (DOR) for 2010/2011. He commented on the design of the Inter-Governmental Fiscal Review Act (IGFR Act), in relation to the FFC's observation that the expenditure assignments between provinces and national government needed to be clarified in the provincial equitable share formula (PES). The most challenging part of the Commission’s work concerned the funding of concurrent functions. This was when the same function was assigned to more than one sphere of government, resulting in confusion as to which should receive the allocated transfer for that function. The basic recommendation for the PES was that the formula should undergo minor changes. One of these changes was that an equalisation grant should be used. The components of the formula should be aligned to national objectives by province. After this re-alignment was completed there would be shortfalls, but this could be accommodated through an equalisation grant.

Ms Tania Ajam, Commissioner, FFC, commented that there was much technical work underpinning the recommendations and a separate technical document would be released that dealt more with the econometric research.

Ms Ajam moved to discuss public infrastructure. She stated that it had been widely recognised that South Africa was in a recession and Government needed to take steps to curb unemployment and poverty. One way of achieving this was through expanding public infrastructure. The impact of this seemed beneficial, according to the FFC's econometric modeling. However, the FFC was of the opinion that spending should not be limited only to building infrastructure, but should also include spending on maintenance, to ensure that infrastructure remained a legacy and continued to deliver service over its useful life. This was one area in which South Africa had been lacking, since in the past infrastructure had been created but the structures, such as schools and hospitals, were now falling apart due to lack of maintenance. Government was simultaneously funding new infrastructure projects. Unless South Africa adopted a new structure for funding maintenance across the country, it would not realise the full benefit of its infrastructure spending. She took Members through the recommendations (see attached report).
In respect of Social Grants, Ms Ajam stated that the current economic circumstances needed a social safety net. The FFC did note that social grants had succeeded in reaching the poorest households and there had been a reduction in poverty. The empirical evidence spoke to the success of the system up to this point. FFC had to evaluate whether the proposals for expansion of the social grant system would result in the additional costs compromising the benefits. There were also concerns around discouraging labour market participation by economically-active dependents. Although this had not been flagged as a problem by the research undertaken by Servaas van der Berg of Stellenbosch University, this must be considered. Another possibility was the creation of “perverse incentives” – for instance, an increase in the childcare grant could incentivise teenage pregnancy, or an increase in the HIV/AIDS grant could incentivise people to forego treatment. There was also the concern that the educational system was not helping to lift people out of poverty, and so there was no long-term path that would get households out of poverty and therefore out of the social grant system. She presented the recommendations on social grants to the Committee (see attached document)

Mr Tebogo Makube, Programme Manager: Fiscal Policy, FFC reported on the rental housing, roads and infrastructure. He noted that although the legislative and policy framework for public hospitals was in place, implementation, integration and coordination was lacking. The FFC’s observation was that the location of functions (between provincial health departments and public hospitals) did affect public hospitals, and that reporting on the public hospitals' budget structures was difficult. The FFC therefore recommended that that there be legislative provisions and norms and standards to ensure a well-functioning public hospital system. It also recommended that government should standardise budget formats and processes for public hospital systems.

Mr Makube noted that the demand for rental housing was increasing in South Africa, specifically by those in lower income groups, who were earning below R2 500 per month. The formal sector had not kept up with this demand. He reviewed the factors hampering rental housing delivery as well as the FFC recommendations.

Mr Makube stated that a well-developed and modernised transport network was needed for the efficient functioning of any economy. There was under-investment in both the construction and maintenance of roads, especially at sub-national levels. A notable recommendation was that investment of roads infrastructure should be increased. The recommendations around funding of provincial roads were contained in the recommendations on inclusion of a road infrastructure component in the PES formula, and expanding the financing role of development finance institutions. Other recommendations were also presented.
Mr David Savage, Commissioner, FFC, dealt with water and sanitation. He stated that water and sanitation inadequacies had the potential to form a bottleneck to economic growth and poverty alleviation. There were gaps between the noble policy intentions and the implemented service. The challenges facing the sector were a lack of qualified staff, insufficient investment in infrastructure, beneficiaries’ inability to pay and an incoherent framework for oversight and implementation of basic services for poor households.

The initial target for universal access to safe drinking water was 2008. By 2007, the statistics showed that only 88,6 % of households had access to piped water, and that the provision of piped water did not necessarily mean that it was safe water. In respect of sanitation, the target date for full sanitation was 2010. FFC commented that on the basis of the progress made by 2007, it was very unlikely the target would be achieved. The target had now been revised to 2014. This constituted an important policy shift, on which there had been very little public debate, considering how critical this was for poor households. The FFC recommended that the free basic water and sanitation subsidy might require a review of the current free basic water and sanitation subsidy policy. FFC particularly noted the risks of rising block tariffs, and the possible errors of inclusion and exclusion, as well as the potential for efficiency in the medium to long term. The principles and practices guiding tariff, subsidy structures and price levels should be made clear and routinely monitored.

FFC further recommended an expansion of access to sanitation services, and proposed that sanitation strategy should also target behavioural change in respect of sanitation practices by households. Government should explore appropriate sanitation technologies that would meet the needs of communities. There had, in the past, been a preference for water-borne networked sanitation, which was extremely expensive to install, operate and maintain. Pursuing this type of sanitation may ultimately limit access to sanitation facilities. Mr Savage particularly noted the need to eliminate open defecation. This was a significant problem in South Africa, where people did not have access to clean and healthy sanitation facilities.  The focus should not purely be on the provision of infrastructure, but also on human dignity and health. The FFC further recommended the establishment of a National Water Regulator, due to the current conflict of interest in the sector.

Mr Savage noted that municipalities faced capacity challenges and this had led National Government to introduce capacity building programmes and grant funding. The programmes were too numerous and had various problems. They could also lead to the creation of negative or perverse incentives. Because only failing municipalities received this support, it actually created an incentive to be inefficient. Broadly, the FFC recommended that the municipalities be central to setting the agenda for capacity building programmes, prior to the development of these programmes or implementation. The establishment of an intergovernmental wide framework, a clear separation of responsibilities between service authority and service providers, and the elimination of the replication of roles must also be dealt with.

The Chairperson stated that the Committee would need more time and access to the research and technical documents, especially since many Members were not present.

Ms R Mashigo (ANC) asked for more detail on the research quoted by Servaas van der Berg.

Dr Setai responded that the FFC would send the members an electronic version of the technical reports, and would also provide hard copies when they were ready.

Ms Ajam noted that the information presented to the Committee was the product of eighteen months of research by the FFC, and it was understandable that members would not be able to absorb all the information in such a short time.

Mr J Maake (ANC) inquired who would receive these recommendations, asking whether they were referred to the National Treasury, the Department of Economic Development or the National Planning Commission.

Mr Bongani Khumalo, Deputy Chairperson, FFC responded that the recommendations were submitted, in terms of the Constitution, to Parliament and the legislatures, and were also referred to the Minister of Finance. The recommendations were also processed through Parliamentary hearings and hearings in the legislatures, with the Departments affected. The Minister of Finance interacted with the recommendations through the Budget Council and Budget Forum. The National Planning Commission had no implications for the FFC at present. The FFC process was clear and it was empowered, through the FFC Act, to request the information needed from departments. There was currently no need for drastic changes.  

Mr Maake asked what an equalisation grant entailed.

Mr Khumalo responded that the design of grants was based on filling a gap between expenditure and revenue. Spheres of government were assigned certain revenue sources, such as taxes, or user charges. On the expenditure side, the sphere of government would be assigned certain functions. The revenue source and expenditure assignments did not always match. A grant would then be introduced to cover the gap. This was not a perfect solution.

Mr Khumalo said that the average revenue raised and average expenditure across the provinces would be examined, and the differences across individual provinces were then evaluated. This revealed those provinces below and average and those above average. Equalisation required those below the average to be pushed up to the average level, while those above were allowed to remain unchanged. This implied that those who had a higher-than-average fiscal capacity would receive less money, in relative terms, than those who had a lower-than-average revenue raising capacity.

South Africa did not currently have an equalisation grant, but instead had something that was closer to a block transfer. The reason was that no meaningful revenue sources had been assigned to provinces. Approximately 96% of provincial expenditure was accommodated by transfers, either through the provincial equitable share or conditional grants. This meant that the move toward an equalisation grant would necessitate more revenue-raising powers being assigned to provinces.

Dr Setai asked Mr Khumalo to expand on the matter of fiscal disabilities in terms of the equalisation grant.

Mr Khumalo referred to the Northern Cape, which was geographically the largest province in South Africa, but had the lowest population and low economic activity. He juxtaposed this with Gauteng, which was geographically small, but densely populated and with high levels of economic activity. He noted that the cost of delivering public services in the Northern Cape would be impacted upon by the accessibility of these services to the people. In order to provide the same level of service to the population of the Northern Cape, it was necessary to spend far more money than would be the case in Gauteng, owing to the problems created by vast distances and the lack of infrastructure in the Northern Cape. This was the fiscal disability the Northern Cape faced. If this province was to be given the same allocations as Gauteng, they would be put at a disadvantage.

He noted that sometimes fiscal disabilities were purely the result of topography. Kwazulu-Natal and Eastern Cape were very mountainous and this made building roads and bridges far more expensive than building them in less mountainous provinces. Other factors like burden of disease could also have a big influence on the intergovernmental transfer formulae. There was a range of factors to consider that could ultimately change the per capita amount allocated to a province. The extent to which this could be covered in a formula was limited by the need to keep the formula transparent, since added complexity would also make it less accessible and less open to scrutiny.

Dr Setai added that provinces had complained that the current formula disadvantaged them, and the equalisation grant was aimed at trying to answer this problem.

Mr Maake referred to the statement that grants were often used in countries where systems failed. He asked how this worked and how it helped people.

Ms Ajam clarified that she had said that there was a temptation in countries, instead of fixing delivery problems, instead to substitute by paying grants. For example, if the problem was youth unemployment, the underlying issue was that the vocational training structure was not providing youth with the skills that were needed in the economy. A youth grant was a short-term fix, but it would not solve the underlying dysfunction in the educational system. This dysfunction, in South Africa, was contained in the fact that the tertiary education system could not accommodate all learners and that practical vocational training was necessary to feed the needs of the economy.

Another example would be trying to improve people's access to health care by instituting a voucher system, as opposed to giving funding to the Department of Health. If the voucher allowed people to use a private health care facility, which most would choose to do, due to the inadequacies of the State healthcare system, then people would be allowed to get better access to healthcare, but this would not contribute to building a State healthcare system that worked and that people would want to use. She likened the use of a grant in these circumstances to a bandage that would cover a wound, but that would not address the underlying deficiencies in the system. It was necessary to focus on these deficiencies.

Mr Maake referred to slide 18 and the comment that there had been disinvestment in social housing. He asked who the culprit was, and if there were suggestions for solutions.

Mr Makube replied that the FFC had a housing research programme, and had concentrated on the rental housing sector for the purposes of the recommendations. The housing institutions constructing rental housing benefited from grants, but the transfer mechanisms were complex. The national department had to transfer the money to the provincial department, and the province could then transfer the funds to the housing institutions. It was therefore difficult to align plans and allocations. This process needed review, as it hampered the delivery of rental housing.

Mr Maake asked what was meant by designated restructuring zones.

Mr Makube responded that the restructuring zones referred to areas designated for rental housing.

Mr Maake referred to the recommended review of the qualifying income band. He asked if this included the government grant and bank financing.

Mr Makube replied that the review of income bands followed the same rationale as adjusting subsidies for inflation. Salaries had been adjusted for inflation over the years, but income bands had not been adjusted accordingly.

Mr Maake asked what was meant by the trade-offs mentioned in Slide 24.

Mr Savage replied that the trade-off occurred between the need to raise revenue (to be used for infrastructure investment and maintenance) and the need to keep the price of water affordable to households. The recent 31% increase in the electricity tariff was an example of the difficult choice between raising the significant funding that was needed to expand capacity, and the need to keep electricity affordable for consumers. In the area of water services, there was evidence that municipalities had been keeping the price of water quite low while sacrificing spending on maintenance and new capital investment. The FFC had not done a study on this yet but had highlighted this as an issue that it would need to examine more closely, as a preventative measure.

Mr Maake asked the FFC to explain the graphs used, commenting that they were not very clear.

The Chairperson agreed.

Mr Savage replied that he did not realise the graphs would provoke such interest, and apologised for the lack of clarity. The graphs showed the level of access to piped water, and he explained that “MDG” standard was safe water. Each bar showed levels according to the Census 2001 data, and the Community Survey 2007 data, by province. The final two bars were an aggregate of the provincial figures for South Africa. It was clear from the graph that there had been increased access to piped water across all provinces, but that access remained low in the poorest provinces of Eastern Cape, Kwazulu-Natal and Limpopo. 100% access to piped water was unlikely, as this would discount other forms of water access such as boreholes. Where access had reached near 100% levels, the challenge was to focus on quality of water.

Mr Savage noted that the sanitation graph showed a less encouraging picture. This graph showed access to septic tank or water-borne networked sanitation related to flush toilets. Pit latrines were regarded as a safe sanitation option. There were still a large number of households in the Free State where the bucket system was still used. This was an unacceptable method of sanitation, and there were efforts to eradicate that. He also pointed out the decline in access in the Northern Cape. This backsliding in indicators was not uncommon in areas where there was lack of maintenance and investment in sewage networks. The FFC could provide more data and research if required.

Mr Maake noted that he was from Limpopo and asked if the low figures for sanitation access meant that most people were using the bush.

Mr Savage replied that it was politely called “open defecation” when people were forced to use the bush. This was an unacceptable method of sanitation. Although the graph concentrated on flush toilets and although there were other acceptable and unacceptable methods of sanitation, using the open would happen in cases when no other sanitation system was available. This eroded human dignity, created a public health hazard and was a safety hazard for women. This challenge was not often discussed, although it was common, and posed an important policy challenge. Basic and safe sanitation was an important right, and he pointed out that it was not the infrastructure that was so critical, but rather achieving the outcomes of health and human dignity.

The Chairperson replied that this showed the need to collaborate with other committees. He thought it critical that other committees benefit from the information provided to the Committee.

Ms Mashigo asked what was the extent of misuse of childcare grants by biological mothers. She stated that there were many instances where someone other than the mother was the caregiver of the child, and asked if the grant could be used by this caregiver instead.

Ms Ajam responded that when the South African Social Security Agency (SASSA) was created, the Department of Social Development was split into two. The social security grants were administered by SASSA, but social assistance, such as counselling and the work to help dependent people to get out of the grant system, remained with the provincial departments. There was supposed to be a link between social security and social assistance. In this case the social assistance end of the system would determine, through counselling and other face-to-face services, who was the actual caregiver of the child and whether the funding was reaching the child.
Ms Mashigo asked if the FFC recommended that the social grants should be linked to the Extended Public Works Programme (EPWP).

Ms Ajam responded that the FFC had recommended this link, but did have some reservations. The EPWP had not shown much capacity in the past. This would be a more difficult job and the question was how they would gear up to do this job. Workfare was meant to bring social security and social assistance together. This would be related to providing people with a grant whilst also in providing them with the skills necessary to enable them to move to being active participants in the economy. It would address the Catch-22 situation that people generally needed experience to get a job. This would require co-ordination between SASSA and the nine provincial departments. Whilst it was a very good idea, the question was how to make this happen in practice.

Ms Mashigo referred to the Development Facilitation Act (DFA), which fast-tracked the transfer of agricultural land for housing and allowed the disadvantaged to acquire land. She stated that there was a loophole in the legislation that resulted in a tribunal to transfer land to property developers.

Mr Makube responded that the DFA was not covered by the FFC’s investigations. It was meant to ensure that land was adequately used for agriculture and settlement, and not inappropriately used for recreational purposes. In future the FFC would look at the DFA.

Ms Mashigo asked what the problem was in getting dam water to people. She noted the De Hoop Dam project as an example, saying that although the dam was close to communities, the people in those communities were not able to use this water.

Mr Savage replied that the FFC had not looked at the De Hoop Dam case directly. He suggested that there might be water allocation issues, in the sense that the dam could have been built to provide mines with water, and the water would then not be suitable for human use or consumption.

The Chairperson clarified that Ms Mashigo did not need a specific explanation on this dam, but rather on the general trend that dams would be built close to the communities and yet people did not have access to water. 

Mr Savage replied that the FFC had not looked into that yet, but there were inter-basin transfer schemes and inter-river transfer schemes. The Lesotho Highlands water scheme was a good example of the latter, and this scheme provided the bulk of water to Gauteng. Other smaller scale schemes would provide for smaller areas, such as an urban area or an industry, but would not necessarily provide for the communities located along the pipelines. The lack of water provision to rural communities might have arisen through historical reasons, if they were not considered part of the service area and were simply ignored at the time when the infrastructure was built. In certain cases, the Department of Water and Environmental Affairs (as it was now called) had intervened and tried to give those communities service. The other reasons might be that the water was already guaranteed to another party through water rights issues. Water quality issues could also play a role, if water was chemically or biologically contaminated and not safe for human consumption, without being treated. In many cases, the treatment infrastructure was not in place. These were some of the issues making this a difficult problem to resolve.

Ms Mashigo referred to the practice of water harvesting through rainwater collection, which the non-governmental organisations (NGOs) were, in many cases, helping communities to do.  She asked if there was a link with the Department of Water and Environmental Affairs (DWEA). It would be beneficial if such a partnership were explored.

Mr Savage replied that there were many possibilities for partnerships with innovators, whether those innovators were NGOs or communities themselves who were using traditional water management practices. The FFC was of the opinion that these partnerships should be actively pursued. The trend since 2000 had been to retreat from partnerships, rather than building on the capabilities of NGOs and communities. Municipalities had progressively come to see these functions as their exclusive role, and were adverse to community, NGO and private sector participation. All parties brought their own capacity and new ideas, and municipalities needed to look at how this could be revised to enable better service provision.

Ms E Ngcobo (ANC) asked if there was a relationship between the water regulator and the Council for Scientific and Industrial Research (CSIR)

Mr Savage responded that the CSIR primarily did the technical water testing to determine the water quality, but was not an official regulator of water quality.

Ms Ngcobo asked if the indigent policy on water provision really helped the poor.

Mr Savage replied that the indigent policy did help the poor. However, he could not see free basic services outside the context of the social grant system, and there was a need to understand the net effect of this. The focus on “free” was perhaps misplaced, as this kind of focus did not work when people did not have access to the service at all. The priority should always be universal access to a service, and the relative benefits of approaches to this needed to be weighed.

Ms Ngcobo stated that departments seemed to have an “addiction” to using consultants, and asked how this could be reduced, and what could be used as an alternative.

Mr Savage agreed that there had been poor management of the use of consultants or advisors. It was necessary, if they were used, to ensure that they were properly contracted. There were certain skills that municipalities did not need to keep in-house. A good example of this would be that very small rural municipalities did not need to employ a permanent engineer, but instead that two or more municipalities in the area could contract one engineer to work on selected days of the week for all of them.  The FFC would encourage this kind of contracting. Quality control of the outcomes, improving supply chain management, monitoring, and specification of goals when contracting consultants were all important.

Mr Maake noted the recommendation for the establishment of a National Water Regulator and asked what the case was currently.

Ms Ngcobo noted reports of various substances seeping into water sources, such as faecal matter, and asked what the role of the municipalities, DWEA and the CSIR were in that instance.

Mr Savage responded that DWEA was now rating water quality and had recently been playing a much more active regulatory role. However, he had some doubts as to whether they would be able to follow through rigorously on enforcement of water quality regulation, since they were also the party setting the policy, which created a conflict of interest.

Ms Ngcobo asked if the new Department of Human Settlements was not meant to look at the issues of integration around housing such as water and sanitation

Mr Makube replied that housing was a concurrent function between national and provincial government and local government, in terms of the Fourth Schedule of the Constitution. Other than the building of houses, services like water, sanitation and roads were critical to human settlement. Although the houses were built by national and provincial government, the services were provided at local government level. This was an area on which the FFC could make a further submission.

Ms Ngcobo stated that it was important to cap dependency on social grants. At the moment people were tending to become perpetual users of the grants.

Ms Ajam replied that the question was really whether the expansion of social spending would result in benefits that outweighed the costs of the expansion. She noted that economic studies used a taxation incentive graph, called the Laffer Curve. The Laffer Curve illustrated the relationship between tax rates and tax revenue, and showed that as tax rates increased, a point would be reached where tax yields started to decline. At that point people had a disincentive against earning more, because an increasingly larger portion of their earnings would be lost to tax, and therefore they would work less. There was currently a debate as to whether a similar point had been reached on social spending. The FFC argued that there was no empirical evidence indicating that this point had been reached. It recommended that Government should keep an eye on the costs, to ensure that social spending was not expanded beyond the point that it would become counter-productive.

Ms Ajam also said that there was a need to look at the underlying problems that the social development sector was attempting to solve. In the long term, it was hoped that children whose caregivers were able to access a childcare grant would have all their needs met, and therefore would be able to become productive and independent citizens. However, this was, in practice, not happening. Although access had been expanded, the quality had not. A key issue was what to do about the quality of schooling, to ensure that children had productive lives past the cut-off age of the grant. These were some of the hard questions that Government needed to answer.

Ms Ngcobo asked if South Africa was close to meeting the Millennium Development Goals (MDGs).

Mr Savage replied that the MDGs included halving the number of people without access to water and sanitation by 2015. He would need to check whether South Africa was on track with this, or had already reached this target. The key issue was not just the availability, but also the safety of the water. The aim was to ensure communities had access to safe water sources. Progress on sanitation had been less desirable. He was not sure if South Africa could manage to meet the sanitation backlog. This was an area for further evaluation. The FFC did not specifically look at progress relative to the MDGs, but could research this as a useful indicator.

The Chairperson pointed out that, similar to the run-up to the first set of electricity blackouts, there had been much talk about the possibility of water shortages in the future. He asked if there was a realistic threat of South Africa experiencing a water shortage.

Mr Savage replied that there although water was technically scarce in South Africa, there was not a water shortage in terms of the quantity available. There were risks around the quality of water and improving this would mean the need to strengthen the regulatory system. He reiterated the recommendation for an independent National Water Regulator, saying that DWEA was not suited to this task because of the inherent conflict of interest. The principles around tariff setting should be to encourage transparency. People had no idea what they were actually paying for, and it was near-impossible to obtain this kind of information from the authorities. He recalled that he had attempted to get this kind of information from a municipal website and was unable to do so. Tariffs should be fair and should also include a component of administrative ease, so that the administrative cost was not too high. There were different tariff structures in different municipalities, and this created different incentive effects.

The Chairperson referred to the extension of the target date for universal water provision and asked what the previous date was based on.

Mr Savage noted that, following the Johannesburg Summit, Government was might have been unrealistic about the original targets. At the time, there was comment that this was unrealistic, and that setting the dates at 2014 was more reasonable. There had been no mechanism to hold the Department to account, and it had simply been allowed to shift the target. This was disturbing as it debased the notion of a time-based target. He felt that this target was a mistake and that the Department's monitoring was flawed, in that it confused level of expenditure with outcomes. The amount spent did not necessarily reflect the number of households connected.

The Chairperson agreed with the observations made about the capacity building of municipalities, and asked if this was because municipalities were not as financially supported as the other spheres of government. He saw their internal collection of revenue as a factor and asked if the FFC had considered this as one of the reasons.

Mr Savage responded that all subsidy systems were incorrect to some extent, technically referred to as errors of inclusion and exclusion. This occurred when subsidies were given to those who did not need them, meaning that those who did need the subsidy failed to access it. The rising block tariffs did have potential for errors of inclusion and exclusion. To make this trend viable, there would need to be enough high scale users to pay more and thus cross-subsidise the poor. This created a situation where, for example, a bachelor stockbroker living in the city, who had low water consumption, would receive free water, while a female-headed household in a low cost housing scheme, with eight dependents, would be charged more for water because its household water consumption was higher. It was difficult to use this tariff based on cross subsidisation. This also raised the question of dependency, as there was no incentive to save water and use water more efficiently. If water was too cheap, people did not attach value to it.

The Chairperson asked what the FFC meant by its reference to standardisation of budget formats for public hospitals, in view of the differing needs and sizes of hospitals around the country.

Mr Makube replied that the comparison of provincial hospital budgets was easy, because there was a fairly uniform reporting format, and this made it possible to benchmark spending at provincial level. However, it was difficult to make a similar analysis at public hospital level, where there were no norms and standards for budgets and reporting. Hospitals used their own discretion and this gave rise to variations. The FFC was of the view that there should be a review of the way that provincial and local government roads were funded. The South African National Roads Agency Limited (SANRAL) was funded by the fiscus. Because it was a national agency it could also generate revenue by tolling of roads, and could borrow on the open market. Provincial and local government funded spending on roads through their transfers and should also be allowed to borrow on the market and have access to Development Finance Institutions (DFI) funding.

Ms Ngcobo referred to the challenges mentioned in the presentation and asked for more detail on the ones not fully expanded upon. She also asked what was meant by concurrent functions.

Mr Khumalo responded that the proliferation of conditional grants was linked to the funding of concurrent functions. The stalling in implementation of government policies concerned issues around roads, accreditation of municipalities to do housing functions, the impact of incentives generated in the system, financing of primary health care, and the broad problem of unfunded mandates. These were areas that the FFC was looking at.

The Chairperson stated that the recommendations had generated much interest, and that the Committee would revert to the FFC with details of what should be covered in future engagements. The next step was for the Committee to engage with the relevant departments. The FFC recommendations were previously seen as matters for the National Council of Provinces (NCOP) to consider, but the Money Bills Amendment Procedure and Related Matters Bill had now made it mandatory for this Committee to interact with these recommendations mandatory. The Committee also had to collaborate with the NCOP on matters that pertained to the NCOP.

The meeting was adjourned.

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