Medium Term Budget Policy Statement: HSRC and Financial & Fiscal Commission comment

Standing Committee on Appropriations

28 October 2009
Chairperson: Mr E M Sogoni (ANC)
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Meeting Summary

The Committee received submissions from the Human Science Research Council (HSRC) and the Financial and Fiscal Commission (FFC) on the Medium Term Budget Policy Statement (MTBPS).

HSRC's presentation focused on issues around decent work and sustainable livelihoods, rural development, food security, health, service delivery, governance and security and education. The consensus was that not enough money had been allocated to some vital areas in these issues. HSRC welcomed the emphasis on  certain areas such as rural development and job creation in the budget. A strong emphasis was laid on sustainable job creation and there was a need for stronger debate, engagement and coordination between different sectors. HSRC remarked, however, that the budget had not given a clear prioritisation to certain issues.

Members focused mostly, in their questions, on education, asking what were the reasons for the despondent attitude of teachers, the high secondary school drop out rate and how schools and the current education system could be improved. Comment was requested from HSRC on food security, the implementation of the crime prevention strategy, how and what in the health system needed to be fixed, and why the Department of Health was always under funded. Members also called for comment on food security programmes, and the link between education and job creation. The Members also asked for the reasons for lack of service delivery and for clarification on issues surrounding local government. Members also said that a discussion about the direction of the Department of Land Reform was needed, and there was a need for further research on food security issues, especially since those living in rural areas did not necessarily want to be involved in agriculture. HSRC noted that it was impossible to do full justice to the questions now, and suggested that a written response be given by 4 November, with a follow up meeting.

The Financial and Fiscal Commission then addressed the Committee, highlighting issues on which FFC had made recommendations. The budget must be seen in the context of the global economic crisis, and FFC was of the view that the government should not be looking for more money, but for ways to increase efficiency, and that there should be money set aside for maintenance, not only for infrastructure building. FFC agreed with the fiscal easing. FFC suggested that financial recovery would come later than expected. It was concerned over the unanticipated wage bill, and recommended that there should be more attention paid to who was being employed, and for what specific purpose. There was a need to look into which conditional grants were gaining interest, and to look at the shifting of functions. FFC also briefed the Committee on Conditional, Neighbourhood Development and Municipality Infrastructure Grants, and the Local Government Equitable Share Formula. Members asked what could be done if municipalities did not use the grants for the purposes for which they were intended, how infrastructure development could be used to cushion effects of the economic downturn, the role of the Development Bank of Southern Africa, comment on education and schools development, and the possibility of drawing funds back from programmes that were not priority or were not spending properly. The powers of provinces, moving of grants, and the relationship between wage settlements and inflation were also queried. It was agreed that the Committee would like to engage more with the FFC on certain aspects, and that it would like to have the FFC present to make input when speaking to departments.


Meeting report

Medium Term Budget Policy Statement (MTPBS): Public Comment
Chairperson’s Opening remarks
The Chairperson welcomed the Committee and the presenters, noting that the Human Sciences Research Council (HSRC) assisted the government each year in meeting the challenges in implementation of the policies. He asked the HSRC to indicate whether it thought the objectives set out in the Medium Term Budget Policy Statement (MTPBS) were attainable.

Human Science Research Council (HSRC) Presentation on the MTPBS
Dr Olive Shisana, Chief Executive Officer, HSRC stated that even though there were many issues that the HSRC had wanted to address, it would concentrate on the issues that were listed as government priorities on Slide 2.
 
Dr Miriam Altman, Executive Director, HSRC addressed the issues around decent work and sustainable livelihoods. She remarked that it was interesting how the priorities were fixed, and she was pleased to see that jobs were seen as a top priority. She said that it was hard to make a direct connection between budget and job creation. She welcomed wording in the budget that stressed the need to shift economy from market based employment to labour based activities. The problem was that South Africa had a resource based economy and most jobs were created in industries like construction and retail. The country had to lead in innovation and not in cost and had to sell products that were unique. She stressed that if the country wanted job creation around innovation then it needed to have dispersed venture capital. In a dispersed economy, jobs would be created in various unexpected places.

She said that HSRC's research had shown that if telecommunications and commercial transport were globally competitive then unemployment would be decreased by 25%. She stressed that not enough transparency was seen in State Owned Enterprises (SOEs), where there was not enough debate. She concluded by saying that the issue of youth, of whom 50% were unemployed, must not be bandied around. She was not sure that the budget was addressing several needs relating to needs of youth development and education. There was a need to put in place a strategy so that government could offer employment opportunities to youth.

Dr Altman then turned to the issue of rural development, which she was pleased had received more attention in the budget. Compared to other countries, more than 40% of the population in South Africa lived in rural areas but less than 10% of those who were economically active were engaged in agriculture. She did not connect this statistic with development but rather said that it was a sign of lack of support. This area of concern needed much more of a step-change to correct areas that needed critical attention (see attached presentation for further detail). The challenge that HSRC saw was that there was very weak monitoring and evaluation of small holding farming and it was harder to follow the agricultural budget.

Dr Demetre Labadarios, Executive Director, HSRC, said that one of the consequences of inadequate implementation that the Chairperson had referred to was lack of sufficient job creation. Unemployment was one of the known causes of food insecurity. He did note that the introduction of social grants did help to reduce the proportion of hungry children from 20% in 2002 to 12% in 2007, but levels were still high, as half the households in the country did not have enough food. Another problem was that 60% of people who qualified for grants did not have access to them. For this reason, the government must find a more comprehensive way to roll out grants.

He said that the impact of policies was partly sufficient. There was a problem with the way budgets were currently administered. He said that budgets aimed at improving food security must be ring fenced and monitored so that it was possible to better evaluate the issue of food security. There was a need to create new tools to determine food security as currently there were none.

Dr Shisana commented on the ten point plan that the Department of Health had adopted, and this ten point plan was reflected in the Mid Term Budget Policy Statement (MTBPS) as something on which the Department was focusing. She said that the Minister remarked that he would like to see some coordination between national, provincial and district level in terms of service delivery.

She noted that the quality of health services in the public sector had been under debate. She countered the view that everything in the public sector was bad but in the private sector was good. She noted that research done by University of Cape Town (UCT) had shown that people who used the facilities believed that the differences in quality of services were not that far apart. She thought that the budget was not comprehensive enough to address quality of health services. A bigger budget was needed to address the problem of human resources, but the new budget was welcomed as it would help retain nurses and doctors in the public sector.

The budget allocated for HIV was welcomed, but was not enough as there was a huge number of people who were infected. The increase in budgets allocated to health were also insufficient in light of the under investment that had happened over a long period. Also, an increase in health budget was needed so that HSRC could monitor the health of the population, in order to properly ascertain whether the current policies and budgets were efficient. She remarked that she hoped the Committee had enough power to change the current situation.

Mr Kwandiwe Kondlo, Executive Director, HSRC, reported on the issue of Service Delivery. He stated that the challenges in this area were lack of access to basic services in local government and the issue of quality of service in the public service. Surveys showed that levels of trust for government were very low. MTBPS did mention that public services did not meet the expectations of the people. Issues that hindered service delivery were lack of professional systems and lack of support between different systems. He stressed the need for better coordination between different government systems which would, among other issues, address the problem of underperformance.

Dr Zwelakhe Tshandu, Senior Research Manager, HSRC, briefed the Committee on Governance and Society. He said that he was closely in touch with the Department of Rural Development and Land Reform and was aware of progress made so far, and was impressed by this department's conceptual and strategic framework for a Comprehensive Rural Development Programme (CRDP) that was done in June 2009. He said that he was inclined to agree with Dr Altman that the budget posed many constraints when viewed against the amount of work that had to be done. He said that the problem with land reform was that intergovernmental frameworks needed to be strengthened at the level of implementation.

Dr Tshandu stated that HSRC believed that good work was being done in the fight against crime.

Dr Nolutho Diko, Senior Research Specialist, HSRC listed key priorities that the government had proposed. She said that she was excited by the priorities but noted that research had shown that academic achievements in South Africa were less than remarkable. Government was aware of this and that was why there was an emphasis on the basics in education. She noted that government asked for teachers, learners and parents to work together to turn schools into centres of excellence, and she asked what the schools had to change to become such centres. She said that there were structures in place to improve governance but they were not fully exploited. Contributing to the low level of academic achievement was the fact that teachers would get learners who were not adequately prepared for school. Another problem that she emphasised was that teachers did not know the criteria that were used to promote them, so government needed to be clearer on this. She also posed the question of how the Further Education and Training (FET) sector could be properly utilised.

Discussion
The Chairperson thanked the team for the comprehensive input but stated that due to time constraints it would be impossible to do justice to all topics raised.

Ms B Ngcobo (ANC) suggested that HSRC take the Committee's questions and then reply in writing.

The Chairperson replied that he would prefer that there be oral engagement on at least the most important matters needing clarity.

Mr J Gelderblom (ANC) asked what the reasons were teachers gave for wanting to quit. He remarked that he believed that in most cases the teachers became tired of doing administration which greatly restricted the amount of time that they had to actually teach. He also commented that if children were not taught in their mother tongue, this might hinder learning.

Ms Ngcobo asked if FET colleges were well and comprehensively resourced. She asked what HSRC meant when it had said that grants needed to be rolled out comprehensively. She asked if there were any problems in provinces regarding nutritional allocation, and what were the tools that could be used to measure food security.

Ms Ngcobo asked if HSRC was implying that all the programmes were under funded when it had said that the budget for health was inadequate.

Ms Ngcobo commented that perhaps people in rural areas did not have the means to protest and that was possibly why these areas were not raising any protests.

Ms R Mashigo (ANC) asked which support programmes for food security were effective and beneficial to the people. She remarked that something had to be done about health. Referring to the issues surrounding service delivery, she said that it might be beneficial to place all the infrastructure under one allocation to increase efficiency. She asked if Early Childhood Development (ECD) was now under one department and how far the alignment of education and economy in South Africa had gone.

The Chairperson suggested that the Financial and Fiscal Commission (FFC) note down some of the questions that it thought would be relevant to their presentation.

Mr L Ramatlakane (COPE) said that the MTBPS made many suggestions on the issue of linking education with job creation, and he wanted a comment on the 10-point system. He wondered whether the system would cushion the problems that there were and he asked what the HSRC suggested should be done to remedy the problem of the high rate of high school drop outs.

Mr Ramatlakane requested a comment on the issue of the crime prevention strategy that had not been fully implemented. Police were reluctant when it came to issues of general implementation that included a partnership.

Mr Ramatlakane noted that HSRC had remarked that the Council, National Treasury and the government did not always understand each other. National Treasury of the South African government yielded a lot of power as it dictated types of policy which in turn dictated allocation of budgets. In order to fix this problem it would be necessary to go to the heart of the problem. There was a need to engage with National Treasury to discuss the direction of the budget.

A discussion about the direction of the Department of Land Reform was needed as the fact that some beneficiaries were selling their land reversed the whole programme. He wanted to know what kind of intervention was being done.

Mr Ramatlakane also said that there was a need to discuss health in detail, and he recommended a financial injection into the current health system in order to fix it.

He said that research needed to be done on the issue of food security as currently there was a lack of sustainability.

Ms N Mkhulisi (ANC) asked whether HSRC had any recommendations on addressing universal access to Grade R and how did HSRC advise government on improving infrastructure and on the issue of training teachers for ECD. In terms of ECD, she noted that the ECD institutions were being integrated but it was not possible to find out what strategies were being used. She believed that the curriculum must be aligned. She asked whether the report considered contextual factors that were being experienced on a daily basis in institutions. Pre-schools were not sustainable, and did not have the teacher training capacity. She concluded by asking how far the HSRC thought that MTBPS could address these issues.

Mr D Mavundla (ANC) remarked that HSRC shared a great deal of information that was of vital importance to the Committee, especially as it had indicated research that had been done, and made recommendations.  HSRC suggested that the Department of Health was under-invested, and he said that there was a need to ask if the Department had not received responses as to why it was always under funded.

Mr Mavundla, referring to the slide that showed public support for National Health Insurance (NHI), suggested that even the lay man on the street should know what NHI meant. He wanted broader information on Dr Labadarios's statements that 'food in rural areas was more expensive' and 'it was expensive to be poor'.

Ms Ngcobo asked if HSRC were aware of the price per hectare of land.

Mr M Swart (DA) said that it was an excellent presentation but every line was loaded, and therefore it would be impossible to render proper justice to it. He suggested that HSRC should return to the Committee another time so that they could have more time to discuss different aspects of the report.

The Chairperson said that he agreed with Mr Swart's suggestion. He noted that the common thread was that there were not enough funds. He asked how government would achieve its objectives, such as the 10 point system, if they had limited resources.

The Chairperson remarked that people who lived in rural areas would not necessarily want to be involved in agriculture or depend on agriculture. Government, at the beginning of the year, set aside R4 billion for Expanded Public Works Programmes (EPWP) to create jobs. He asked if there was a study done to research the effectiveness of EPWP. Looking at the Department of Agriculture's Annual Report, the Committee was not convinced that there was sufficient expenditure in these programmes. Clearly there was under spending, but he was not sure what should be done.

The Chairperson said that the presentation talked about the limitations of support and what people in South Africa needed was a basic income grant. He wondered if the distance between public representatives and citizens was what was affecting Service Delivery in South Africa or if there were other matters that had to be considered. He asked if support to local government was sufficient. He wondered why the report focused on crime in Western Cape or if there were particular lessons that led the researchers to focus on Western Cape.

The Chairperson suggested that HSRC just respond to some salient questions, then respond to other questions in writing, and the Committee would try to arrange a follow-up meeting later.

Dr Shisana responded that if HSRC were to respond to any answers now it would merely open up many other questions. She therefore suggested that the team should respond in writing and arrange for another meeting where they could discuss the key questions.

The Committee agreed.

Dr Shisana thanked the Committee for giving the HSRC the opportunity to speak with members. She remarked that in the budget it was clear that prioritisation had not taken place. Everything looked as if it was a priority. She suggested that more work needed to be done on the budget so it reflected the real priorities. She concluded by stating that HSRC considered that it had a responsibility to reveal policy, monitoring and implementation, and would be prepared to support and assist the Committee.

The Chairperson extended his gratitude to the presenters and asked that the answers be provided by 4 November 2009.

Financial and Fiscal Commission's (FFC) response to the MTBPS
The Chairperson asked if the Financial and Fiscal Commission (FFC) could respond to some of the questions that were made, especially around infrastructure. The FFC had made recommendations at the beginning of the year. He asked for their comment on the MTBPS.

Dr Bethuel Setai, Chairperson, FFC, said that FFC would talk to specific references that were made in the budget that had to do with the FFC recommendations. He would like to highlight key issues of the MTBPS that merited the Committee's consideration. FFC's approach was that this budget should be seen in the context of the global economic crisis. The government should not be looking for more money, but for ways to increase efficiency. There was a need to address mechanisms. The National Treasury was saying that it had put forward proposals as to how it thought the country should move forward. FFC realised that one of quick fixes was going the infrastructure route, but also in the recommendations was the need to have a maintenance budget.

Ms Tanya Ajam, Commissioner, FFC, said that whilst priorities had been consistent it was the fiscal environment that had changed and that made the attainment of those priorities so difficult. The national proportion of this revenue pool continued to decline steadily over the Medium Term Expenditure Framework (MTEF)  period. The sub-national, provincial and local government allocations also increased steadily,  as national allocations decreased. FFC agreed with the fiscal easing, considering that it was appropriate for South Africa to ease its fiscal stance.

FFC had done its own macro-economic modelling on what economic aggregates were likely to be in the future. Its modelling suggested that the financial recovery period would not come as early as was predicted and this meant that the recession might take longer than expected. South Africa as a small opening market was heavily influenced by international markets.

The FFC was concerned over the unanticipated wage bill. There was a need for collective responsibility and the FFC recommended that government should increase efficiency by reconsidering how and who it employed, since personnel expenditure was the biggest portion of the budget.

Mr Bongani Khumalo, Deputy Chairperson, FFC, said that the FFC had noted the pressure on provincial budgets over the course of the year which would be imposed by personnel demands. He suggested that there was a need to look into which conditional grants were gaining interest. The Commission noted that there had been a revision in the provincial equitable share baseline, which was in anticipation of shifting of better education and training colleges from the provincial sphere to the local government sphere. FFC's view was that while this was something that had been decided upon, there was still a constitutional process that must take place around the shifting of functions. Caution had to be exercised so that service delivery was not disrupted. The process of the amount that had to be shifted must be transparent. He said caution must be exercised so that the chaos that ensued when social grants were shifted was not repeated.

Equitable shares increased mainly because there was a need to help municipalities cope with the anticipated increasing electricity prices. Larger municipalities were generally able to sustain themselves through revenue generation but this would change because of the economic downturn. He briefed the Committee on Conditional, Neighbourhood Development and Municipality Infrastructure Grants, and the Local Government Equitable Share Formula. He said that there was a need to look at the impact and performances of grants.

Discussion
The Chairperson thanked FFC for its presentation but requested that in the future they look at areas of interest similar to the HSRC.

Mr Swart, referring to Slide 4, stated that whenever there was a wage increase there was no consequential increase in productivity, so it was clear there was no consequential investment especially in infrastructure. A major proportion of municipalities did not use the grants for the purposes for which they were intended, so he asked what could be done to tackle that problem.

Mr Ramatlakane asked for FFC's comment on the issue of borrowing, and for a comment on how infrastructure development could be used to cushion effects of the economic downturn.

Ms Mashigo asked what the role of Development Bank and South African Local Government Association (SALGA) was, so that one could better understand when one looked at the spending and performances of local municipalities.

Mr Gelderblom, referring to Slide 4, bullet point 3, said that after HSRC's presentation it was clear that there were problems in the area of Education and Schools Development. He asked for FFC's comment on that issue.

Ms Ngcobo said that some departments had some programmes that were not as urgent as priority programmes, and were not using funds as fast as possible. She suggested that National Treasury could keep these funds for fast lane projects and she asked for FFC's take on that.

The Chairperson asked how accurate the shares on Slide 5, were as the Minister of Finance's indication had been different.

Ms M Tlake (ANC) said that she heard mention of powers of provinces and that they were able to decide as they wished on the allocation of funds. She asked what FFC could advise, and if this was something that occurred only in provinces, or whether it also happened in national government.

The Chairperson asked how the FFC thought the question of moving of grants should be handled. He asked what the consequences of a wage settlement were and what the relationship between wage settlements and inflation was.

Mr Khumalo answered that FFC had said that there was a need to synchronise what happened after provinces had been given an indicative amount of money of what to budget in terms of personnel increases. The Occupation Specific Dispensation (OSD) issue was a different issue altogether, and there were mistakes in the way in which OSD was first rolled out. Generally, wage agreements were centralised but this became problematic for provinces when agreements were reached that were far higher than the indicative amounts that were budgeted.

Speaking as an economist, Mr Khumalo remarked that he could not say that there was a direct link between wage agreements and inflation, as people would ask for wage increases with expectations of inflation.

Mr Khumalo felt that what was important in terms of borrowing for infrastructure was whether or not the economy was resilient enough to sustain the debt service requirements. When debt service was high, from 1994 to 1996, there were issues around inherited debt. Debt must be associated with the reason for the debt. The decision to borrow must be seen as a decision to postpone tax increases. There was a good period where the debt ratio was on a decline, and additionally a significant amount of the debt was domestic. If the government was borrowing internally and paying back internally, thus hopefully investing internally, this justified these levels of debt.

What was vital in respect of the budget over the next three years was the pressure that had been put on the security side to cushion people against the effects of the economic downturn, plus pressures on personnel budgets in terms of how much of the borrowing was spent on productive infrastructure. A significant proportion of borrowing was used to pay for infrastructure projects. The country was still reaping benefits of not having spent the surpluses on useless investments. When budgeting, there was a need to ensure that institutions stayed within the budget, as benefits reaped from investments should benefit future generations. FFC had to examine to what extent borrowing stifled private sector borrowing, as generally more jobs were generated in the private sector.

The Development Bank of Southern Africa (DBSA) received an injection to capitalise from the fiscus, and FFC would like to see this assisting the poor or lower capacity municipalities to help them play in the financial market. DBSA was, and probably remained the biggest lender to bigger municipalities. The problem was that it pushed out private market players so the concentration of lending was in the bigger municipalities. DBSA received its money through Siyenza Manje so it was difficult to assess what role it had played as the funding did not flow through the Division of Revenue Act.

FFC's view, in relation to that of the HSRC about education and rural development, was that it would be good to tie them up with the relevant departments. Access to Grade R was not an issue of the budget, as the numbers of learners who were enrolled was higher than those who were actually sitting in classes. Allocation of budget was clear when it came to these issues. However, they needed to be better integrated. There was a strategy plan for rural development but the question now was how this would be built into the financial framework. The current transfer system had nothing to do with agriculture. An overall review of the transfer system was required before one could assess its successes.

Responding to the question of provincial powers deciding how to spend money, Mr Khumalo said it probably only happened with equitable shares. He emphasised that there was a need to distinguish between conditional grants, which belonged to national departments, and equitable shares. Some municipalities were reluctant to accept grants because of the conditions that were attached to them.

Mr Khumalo then referred to the question of shifting of FET functions, and said that the current equitable share formula indicated what the demand for FET was, and that it would include Adult Basic Education and Training (ABET). FFC would ask National Treasury to give a clear transparent process of how it had arrived at the amount it had earmarked for FET.

Social development, which included social grants and welfare, had an indicative amount of 18% on provincial equitable shares. On average, provinces were spending 32%. If there was to be a  move of this function, then the question was how much money would be taken away from the pool. There was a need to come to an amount that would be spent on FET, and say how much of this would be for equity, as provinces spent differently. FFC would come up with its own proposals once it had seen what the provinces wanted to do.

Dr Setai said that the Minister had said that South Africa could afford borrowing as there was a surplus, but it depended on the source of that borrowing. If money was borrowed internally, that was fine as there was no danger, but there were issues if there was borrowing in foreign currencies such as the US dollar.

Dr Setai noted that the issue of infrastructure needed to be addressed. Money should not simply be put into infrastructure, as the objective there was to generate jobs. Infrastructure must be self financing, for example, if the country was to build roads then there should be toll gates on the roads to return the investment. Infrastructure earmarked for the poor was effectively money given away, so there was a need to strike a balance between how much money was given to the poor and how much was given to areas where it would generate money.

He agreed with Mr Khumalo that synchronisation was needed. In this term, it was stated that there would be an addition of R13 billion to the wage bill, and this money would pay government people who did not produce goods.

Ms Tlake remarked that money spent on public servants was not wasted, as those departments produced a better life for people, which, in the long run, would reduce their dependency on social grants and social welfare.

The Chairperson said that in the interest of time constraints that question could not be answered.

The Chairperson said he would like to engage with departments, in the presence of the FFC. He thanked the FFC for its input and support.

The meeting was adjourned.

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