Financial and Fiscal Commission Annual Report 2008/09

NCOP Finance

27 October 2009
Chairperson: Mr C De Beer (ANC)
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Meeting Summary

Mr T Chaane (ANC) was elected as the Chairperson for the new Select Committee on Appropriations was elected.

The Financial and Fiscal Commission (FFC) presented its annual report for 2008/09.
Major achievements included the Commission identifying its own areas of research, development of models for technical analysis, workshops held and visits to provinces to discuss the analytical tools with the provinces. A risk management framework was established and issues of external and internal audit systems were addressed appropriately.

The FFC noted that it had made recommendations on no-fee schools, including assessing the socio-economic position of learners. It also assessed how resources were accounted for when they were distributed at hospital or clinic level.  Recommendations on housing delivery were tabled, and Government would review the powers and functions of provinces and local government. Recommendations were made to augment revenue sources for municipalities to ensure that if revenue raising powers for municipalities were introduced, municipalities would have sufficient control of those revenue sources. The Commission brought to Government’s attention the impediments that could arise in the Division of Revenue Bill if policy decisions were not taken and it had provided simulated scenarios if electricity prices rose. A key issue of concern was the increase of Conditional Grants, since it was noted that as the grants increased, provinces tended to reduce their own contributions.

FFC had received an unqualified audit with no matters of emphasis. It described its spending, noting that the bulk went to personnel costs, operating expenses and professional services, which were necessary in some instances due to the very short term nature of the work. Economic constraints resulted in a decreased revenue, and the audit fees were of concern as they were a high percentage of the total budget. The FFC had requested more funding and highlighted, both for the Committee and National Treasury, its major budgetary constraints. It had made achievements despite these challenges. It highlighted the need to attract and retain qualified staff, the need to replace its outdated information technology infrastructure, and to train to develop internal skills. The costs of travel were also high, although the budget for travel was low. FFC was trying to operate with austerity measures and had to constantly reprioritise.

Members congratulated FFC on its excellent report. They commented that the challenges of intergovernmental fiscal relations, transport in education and the quintile ranking had to be addressed. In particular, universities needed to start offering intergovernmental programmes in their curricula. Members highlighted the particular challenges around transport of learners, especially to take them on sporting fixtures, which was exacerbated in many provinces by long distances that were too expensive for parents. Once again, in relation to the Northern Cape, other challenges arising from the use of the population figures as the basis for assessment, was queried and there was a substantial discussion on the interaction between FFC and the provinces on the equitable share formulas. Members also asked why the FFC had not highlighted the financing of healthcare as a challenge. They enquired about the Eskom intervention, and relationship with the Human Sciences Research Council and Statistics SA. The costs of the staff, the reasons for high staff turnover, the employment equity and disability ratios and attendance of commissioners at meetings were also questioned.  Members noted the importance of encouraging the provinces to liaise with the FFC.

Meeting report

Election of Committee Chairperson to Select Committee on Appropriations
The Committee Secretary noted that a Select Committee on Appropriations had been established, and called upon Members to nominate a Chairperson for that Committee.

Mr C De Beer proposed Mr T Chaane (ANC), and Mr D Bloem (COPE) seconded that nomination.

Mr M Makhubela (COPE) proposed Mr De Beer, who declined to stand.

Mr D Bloem (COPE) jokingly offered himself but there were no seconders.

The Committee Secretary accordingly declared Mr T Chaane as the Chairperson of the Select Committee on Appropriations. Mr Chaane thanked the Members for their vote of confidence

Committee business

Mr De Beer then welcomed Mr Chaane and other Members to the meeting. He noted that there was now a Committee programme for each of the Select Committee meetings on Finance and Appropriations and Members would have to be vigilant and decide what issues to attend to.

The Chairperson noted that the Committee would deal with the Mpumalanga over sight report on 30 October. He asked Members to prepare written reports and propose solutions to
the problems of the seven municipalities, before Friday 30 October. The Committee would also need to complete its report on the FFC recommendations arising from the hearings in the provinces and departments before the recess on 20 November. He noted that economists and stakeholders would be commenting on the Medium Term Budget Policy Statement (MTBPS) on 3 and 4 November.

Financial and Fiscal Commission (FFC) Annual Report 2008/09 briefing
Dr Bethuel Setai, Chairperson of the Financial and Fiscal Commission, introduced other  members of the Financial and Fiscal Commission (FFC or the Commission).

He noted that the Constitution stated that the FFC must be an independent, objective, impartial and unbiased institution that gave advice to Parliament, the three spheres of government and other organs of State, on the division of revenue, as well as other financial and fiscal matters.
The purpose of the Commission was to provide proactive and independent advice through research capabilities, and to enhance the developmental impact of public resources through the financial and fiscal system in South Africa.

The National Executive nominated the Chairperson, Deputy Chairperson and two other Commissioners. The Premiers of Provinces nominated three Commissioners, while organised Local Government nominated two Commissioners and the President appointed seven Commissioners. The Chairperson was the Chief Executive and Accounting Officer, and both the Chairperson and Deputy Chairperson were full time Commissioners, while all other Commissioners were part time. Since July 2009, the Commission had been awaiting the selection and appointment of the organised local government nominee. The terms of office for the commissioners were set out.

Mr Bongani Khumalo, Deputy Chair, FFC, explained that the key output that was required by legislation and intergovernmental fiscal relations was to table a submission on recommendations for the division of revenue, before the Minister of Finance tabled the Division of Revenue Bill for each financial year. The recommendations for the 2010/11 financial year were shared with the Committee in August 2008 and tabled in May 2009.
After the Minister tabled the Bill the FFC had to meet with the Select Committee on Finance and submit the recommendations that came out of the consultation processes with the Minister of Finance. FFC also must make submissions on the Annual Report and other requested topics during the year.

The FFC had to be measured against its compliance with legislation and the timeframes within which responsibilities were performed. One major achievement by the Commission was the identification of its own areas of research. At the request of Parliament, government departments and stakeholders, the FFC created a separate document, which contained technical work that informed recommendations. Models for technical analysis were developed and some were shared with Parliament and government departments. Workshops were run with members of the Finance Committee and other parliamentarians. There was a commitment to provide planning to parliamentarians on an ongoing basis. In the Free State and Limpopo, the FFC shared its analytical tools with the provinces. Internal and external audit systems issues were addressed successfully and a risk management framework was established, this being an area that had raised concern in the past.

The FFC made recommendations about its impact based on the responses received from the Government through the Minister of Finance. The FFC examined the No Fees School policy and its recommendations included assessing the actual socio economic position of learners as well as more focused targeting to ensure that the right people for the programmes were being targeted. Government accepted the recommendation, and the Department of Education was now perfecting the targeting mechanisms.

Another key recommendation had looked at how resources were accounted for when they were distributed at hospital or clinic level. The Division of Revenue Act (DORA) required that information around financing be reflected and gazetted at the level of clinics and hospitals. Clinics fell under municipalities, or, in some instances, were providing primary health care for provincial governments, and the disjuncture in their financial year ends created a gap. FFC tried to align the years, or at least reflect some allocations in those years, but this would take some time.

FFC’s recommendations on housing delivery were tabled, and Government would review the powers and functions of provinces and local government. There was a need to speed up the process of accrediting municipalities to deal with some of the uncertainties associated with their service delivery of housing. It was imperative that the work of municipalities and provinces were linked when delivering houses, and also that they take into account the concept of the human settlements, because a range of other services resided with the municipalities. The highest demand for housing and informal settlements would be in municipalities that had capacity and were more organised. Government policy could also accredit some of these municipalities for service delivery and housing.

Recommendations were made to augment revenue sources for municipalities, to ensure that if revenue raising powers for municipalities were introduced, municipalities would have sufficient control of those revenue sources. If municipalities determined the tax base and set the tax rate, there had to be a link between revenue sources and accountability, so that people could see the benefits of the taxes they paid. Any disjuncture would make it difficult to deal with questions of accountability and service delivery failure, particularly where people were paying rates. The Commission felt it was also important to consider whether the Regional Service Levies that were abolished two years ago should be replaced.

FFC had done substantial work around electricity pricing generation and distribution, and Government agreed to the initial recommendation. FFC considered how a 100% price increase would impact on the economy and people, and concluded that in this case, government would have to intervene directly to protect the poor and vulnerable. FFC had addressed government on what impediments that could arise in DORA if policy decisions were not taken, and if implementation was stalled, particularly in the electricity distribution industry. At the moment, Constitutional amendments were being addressed, since there needed to be enabling legislation to allow government to move ahead with restructuring the electricity distribution industry.

Another key issue of concern was the increase of Conditional Grants since they introduced an incentive effect within the intergovernmental fiscal relation system, and a trade off with equitable shares, in the way departments spent money on particular programmes. Some grants and numbers indicated that a direct substitution was being effected. The National School Nutrition Programme (NSNP) encouraged the provinces to provide nutrition for school children, and it was expected that the provinces would supplement these allocations. However, as the grants were increased, the provinces’ contribution dropped. This was not desirable, as it was expected that the programme be put through provincial budgets as it was institutionalised. Money spent on capacity building grants was often found to have gone to waste, without any benefits, so the way in which capacity was being financed and built had to be reviewed. It was recommended that no legislation was required, in the context of the review of the Public Finance Management Act (PFMA). The FFC had been opposed to the legislation.

Mr Mavuso Vokwana, Chief Financial Officer, FFC, noted that the Commission had achieved an unqualified audit report with no matters of emphasis from the Auditor-General (AG). The revenue received from government for the 2008/09 financial year was R26.1 million and 1% was interest received from the bank. The bulk of the revenue went to personnel costs, operating expenses and professional services. The major cost driver for operating expenses was the office rented for the Commission. A large amount was spent on publications and there were also expenses for information technology (IT) and other minor operating expenses.

The economic constraints experienced by the government had resulted in decreased revenue of 5% although revenue costs were increasing. Staff costs decreased from R16.1 million to R15.1 million and these were a major challenge to the FFC, because of the need for highly skilled employees. There was competition from the public sector, which poached research staff from the FFC, especially those with knowledge of the core business of the FFC. The FFC had acquired no new assets for about four years, so its asset base had decreased by 19%, and depreciation had decreased by 10%. Professional fees had increased, and consisted of audit fees and technical staff used for researching. Audit fees accounted for 5% of the total budget, which was too high, and internal audit fees also had to be paid. Operating expenses decreased from R8.2 million to R6.9 million as cost saving mechanisms were put in place to improve the internal control systems. Liabilities were only addressed at the end of the financial year because the work cycle was not in line with the financial year. These had increased by 7% from the previous year. IT remained a challenge for operations. The MTEF allocation for 2009/10 was reduced to R24.7 million, compared to R26.1 million in 2008/09, rising to R27.5 million for 2011/12. The Commission had requested more funding and had highlighted the major budgetary constraints to National Treasury.

Dr Setai emphasised that the FFC’s achievements were reached despite the many challenges, of which the most serious was human resources. It was difficult to find and retain qualified staff, especially for the core business. Financial constraints also made it difficult to develop internal skills, although some attempts were made to do so. Human resource strategies and policies were in place. He stressed that FFC needed to replace its IT infrastructure, as it was outdated. FFC had to pay for its accommodation directly and funds did not match functions. The cost of compliance had continued to increase, and the FFC had no control over this. FFC was doing critical work in research and stakeholder engagement, but the cost of travel was high while the budget for travel was very low. The FFC was operating under austerity measures, had to constantly reprioritise, and was stretched. It was finding it hard to manage the deficits. Many of these resource constraints had the potential to undermine the effectiveness of the Commission.

Discussion
The Chairperson congratulated Dr Setai and the FFC team on the unqualified report received from the AG and for setting an example to other State departments. He noted that the challenges of intergovernmental fiscal relations, transport for education, and the quintile ranking had to be addressed. The transport of learners from poor communities to sport activities after school hours was very expensive. For instance, in the Northern Cape, a trip of 64 kilometres could cost R900, which parents could not pay, and this would relate also to other areas where access was difficult. He noted that the FFC’s recommendations on quintile rankings were accepted, but in practice pointed out that there were poor and wealthy people living in the same town, so that how they reached a ranking must be reviewed.

Mr Khumalo responded that the Commission had made a recommendation on learner transport in 2007, for DORA of 2008. This process was under way. The previous Ministers of Education and Transport had accepted the recommendations. In some provinces the Department of Transport was responsible and in others the Department of Education. The Department of Education had created a policy, but at national level there was nobody to direct it, and as yet no national legislation was in place to create norms and standards for dealing with learner transport. The FFC had suggested defining those functions.

He agreed that learner transport problems also existed in other provinces, although this had not been highlighted in the current submission. There must be a way found to track responses to ensure that recommendations that had been accepted were then implemented. It was not the Commission’s mandate to ensure the implementation of recommendations and this had to be addressed at another level.

The Chairperson also asked how the Commission would perform its tasks, since there were 33 vacant posts.

Dr Setai responded that FFC and a team from National Treasury and Department of Public Service and Administration (DPSA) had revisited the mandate and concluded that FFC was under funded and under staffed, and a personnel plan was requested. This could be made available to the Committee. FFC was reviewing what legislation must be complied with, and definitely needed assistance with its financial constraints.

Mr Makhubela congratulated the Commission on work well done but said he did not understand why the FFC did not highlight the financing of healthcare as a challenge. He suggested that it must tell government that it needed a certain number of people to achieve the targets, and forward a breakdown of the costs to government.

The Chairperson said that at the hearings in early November, departments would be making their input on the budget adjustments and appropriations, and questions could be raised in that meeting.

Mr S Montshitsi (ANC) asked for clarity on the Eskom intervention to address rising costs.

Mr Khumalo said that currently the local government equitable share formula determined the allocations. A free basic electricity component was meant to subsidise municipalities in providing free basic electricity. An economy wide model simulated changes, based on social accounting measures that used community surveys, and various household information. Adjustments were made to the model, based on the projected demand for electricity, a profile across communities and the different impacts. The model might show that for reasons of access, the poorest of the poor, who generally received free basic services, in fact used very little electricity or had no access to it.  Therefore, price increases in electricity would not impact upon them directly. On the other hand, expanding access to electricity meant that more new users and poor people could access electricity, and when prices increased, the defaulters were usually to be found at this lower end of the market. The commissioners nominated by local government had an understanding of the problems that municipalities faced when electricity prices increased. A programme had to be designed to cushion the poor from escalation in the electricity prices. There was a need to look more closely at the intergovernmental transfer system. Follow-up work was needed with National Treasury and the relevant departments. The previous Chairperson of the Committee on Finance had requested the Department of Minerals and Energy (as it was then named) make another submission, but no direct input had been given to FFC.

Mr Montshitsi also questioned the relationships between the FFC, Human Sciences Research Council (HSRC) and Stats SA in gathering information.

Dr Setai responded that the FFC did not have a Memorandum of Understanding with the HSRC, and currently the Commission’s researchers went there to gather and exchange information. FFC technical staff had interacted and worked with Chapter Nine institutions on certain issues. The FFC wanted to create relationships, but not formalise them for the medium term.

Mr T Chaane (ANC) asked how much of the total revenue went to personnel, what the real cost of the entire staff was and the reasons for the high staff turnover. He enquired what the current percentage was of staff with disabilities, and, if this was below 2%, how the targets would be reached. He asked how poor attendance at some meetings impacted on the work of the FFC.

Mr Vokwana responded that the FFC was a human-resource based institution and the personnel were the resources used to produce the Commission’s final products. The personnel costs should be much higher. At present they were just below 58% of the allocated budget, and some funds were also used for technical advisors who assisted with research.

Dr Setai said that the reason for the high turnover was when young people new to the labour market were employed at the FFC, they would often work for a while before leaving for better offers from other organisations, including government departments or National Treasury.  At one stage, FFC tried to match those salaries, but had decided that FFC was not an organisation that could meet those demands. Interestingly, some who had left had subsequently sought to return, and there was some debate whether this should be allowed. The employees indicated that FFC had been allowing them to develop whereas their development at other employers often led them in the wrong direction. FFC was receptive to such approaches, but was aware of the risk of being “used”. Dedicated commissioner were available to respond at short notice, were interested in and conducted research. However, FFC was indeed under funded.

Mr Mashumi Mzaidume, General Manager, FFC, said that FFC’s employment equity had been considered by the Department of Labour to be reasonable. No people with disabilities were currently employed. FFC tried to use specialist recruitment agencies, and although it had targeted employment of people with disabilities, they had not arrived for their interviews.

Mr G Mokgoro (ANC) commended FFC for its outstanding report. He said he did not agree with the population head count in provinces being used as the criteria for making recommendations or allocations, since those provinces with low populations would be disadvantaged by this method. In the Northern Cape, people from some parts might have to travel a whole day to reach a hospital to access health services. Parents might also need to pay to send their children to another province for tertiary education, yet the children would not return to work in their home province but would give inputs and value to other provinces. This was a serious concern. Not only would the children be separated from their parents, but the costs of accommodation, transport and food were much higher for those families. He suggested that it would be appropriate to think about other criteria for Northern Cape and other provinces, based on their unique circumstances.

Mr Khumalo said the last time he had an interaction with the Legislature in the Northern Cape was in 2004. However, the FFC had been looking to review the provincial equitable share formula. In 2007 he had a discussion with the Head of the Provincial Treasury in Kimberley about the matter, and follow up meetings were held in Midrand with all the provinces. In some of those meetings the Northern Cape was not represented and no follow up input was received, despite written requests. When
reports from provincial treasurers showed that an adjustment of the formula was needed, because of issues specific to a province, the FFC sat down with the provincial and National Treasury, looked at the different options and evaluated what could be done.

Mr Khumalo explained that when the equitable share formula was introduced, and the decision was taken to use a population approach, Northern Cape was already raised as an issue. The institutional component of the formula was used as a benchmark for every province to run its institutions of government, and funds were distributed in proportion. Provinces could generate money out of the institutional component. If this was removed, Northern Cape would lose substantial funds. He said it was complicated and all provinces with specific circumstances had to meet and agree about issues. Any replacement model should not result in advantage to one province while disadvantaging another. The review had taken into consideration the views of the different provinces, but the FFC would have liked to meet all provinces. Only three of them had interfaced with the Commission’s recommendations since 2005, and those whose input and cooperation were not given were therefore not heard at national level. After the recommendations were made, the Free State, Gauteng and the North West provinces had invited the FFC to speak to them about the formula again because they wished to raise concerns.

FFC noted, on the review, that some indicators tended to distort matters, particularly in the healthcare component, which had looked at the proportions of those with and without medical aid, but what was not taken into account was that those who had medical aid, but ran out of it part way through the year, would then return to the public hospital system. It was a huge challenge for FFC to get input and information from everybody with whom it interacted, as well as to get information specific to provinces.

The Chairperson requested that Dr Setai and his team look into those matters.

Mr Montshitsi appreciated the response. He joked that if the diamond mines could be opened, no doubt people would flock to the province.

The Chairperson noted that Trans Hex was making more money than last year in the diamond industry, so there was something positive happening on the west coast of the Northern Cape and he suggested that the Committee pay an oversight visit there.

Mr Mokgoro responded that this raised another very serious issue, since those in the Northern Cape did not own the Trans Hex mines, whose head office was in another province. Neither the private sector nor government was creating a balance. Some areas got their wealth from exploiting the poorer areas, and he asked Mr Montshitsi to remember that he should speak as a Parliamentarian.

Mr Montshitsi withdrew his comment and apologised to Mr Mokgoro.

The Chairperson said that he did not think the remark was meant personally. However, he confirmed that Trans Hex was making money in the Northern Cape, and that issue should be addressed by the leadership of the province with the mining company.

The Chairperson also stressed that Mr Khumalo’s response had highlighted some very serious issues. Members should engage with their provincial legislatures and set meetings with the FFC. Provincial delegates would be present on the following day, and the Committee should raise the matter for delegates to engage with. He would interact with the Premier of the Northern Cape, the Speaker of the Legislature and the Acting Chairperson, and expressed his disquiet that the Northern Cape had not cooperated over the past few years.

Mr Mokgoro responded that if the Commission was willing to meet and interact with the Northern Cape province, he would engage with the leadership and provincial Treasury, since the FFC indicated that the province was responsible for part of the review of the equitable share formula, and the possibility existed that the province could persuade the FFC to consider issues that the province needed to have addressed. He asked if FFC could provide him with an explanation in writing.

Dr Setai responded that, according to the budget policy statement, the FFC was an independent body that made recommendations to Parliament and the Provincial Legislature about financial issues. He could provide a written explanation if the request came from the Committee.

The Chairperson said that the Committee would take the matter further within the provinces and would facilitate meetings to bring the stakeholders to the table since it would benefit the provinces.

Mr Makhubela said that the use of consultants for specific areas of expertise affected the budget. If they were hired continuously, it might be better to recruit them to reduce the expenditure.

Dr Setai responded that the FFC had deliberated about this issue. Consultants would always be a permanent feature of the FFC, because some issues were short term and the person would be needed only for that specific task, and would be redundant if employed for longer.

Mr Khumalo added that the FFC worked in the area of intergovernmental fiscal relations, and this was not taught at university. Young staff working for the FFC had to be trained to interact with Government at different levels to implement the work of the FFC. The same people tended to then move on in government, and FFC relied upon them then to provide technical expertise and capacity building. The turnaround time for a researcher at the FFC was approximately three years. In 2008/09, a number of researchers who had almost reached senior levels moved on, and the Commission was left with fairly new researchers. This was a key problem faced by the Commission. In order to continue with the work FFC sometimes had to use consultants. Succession planning and headhunting became very difficult given the size and inflexibility of the budget, and it was also difficult to judge at what stage to hire consultants to wrap up new projects. The costs of audits had also escalated, and FFC was intending to approach the AG as it was paying about 5% of its already small budget back to another department.

The Chairperson responded that the quarterly budget council was also a place to address those issues. He thought that intergovernmental fiscal relations should be a part of university curricula, and he would raise the issue with the University of Free State. He thanked Dr Setai and the team for presenting a good Annual Report about the trends and recommendations for revenue. He invited the FFC to present when the Committee engaged with municipalities on the spending of Conditional Grants. Although the Committee’s oversight visit to the Northern Cape would not materialise during 2009, because of other planned work, it should be planned to occur early in 2010.

He noted that Committees would resume their meetings and activities as from 11 January 2010, because the NCOP programme and the school programme went in tandem.

The next meeting would be held on the following day.

The meeting was adjourned.

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