Financial and Fiscal Commission Workshop: tracking mechanisms, spending of grants

NCOP Finance

15 March 2010
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

Officials from the Financial and Fiscal Commission (FFC) gave a workshop to the Committee. In the first presentation the Provincial Equitable Share (PES) formula was tabled and discussed, including the background to it, the Constitutional imperative, institutional framework, economic rationale, historical background, current structure and review. It was emphasized that the FFC’s key function was to consider the annual division of revenue between the three spheres of government. The FFC also had the mandate to consider any other conditional or unconditional allocations to provinces or local government. Constitutional imperatives in terms of Sections 217 and 214(2) (a-j) were highlighted. Options for reform regarding the Provincial Equitable Share were also discussed.

Members questioned the stages of the FFC’s involvement with the actual budgetary process, as well as the provision of equitable shares to the provinces. The Members’ cause for concern derived from the alignment of national priorities with those at provincial level. National Treasury as well as the FFC noted this concern and responded.

In the second presentation, on the Local Government Equitable Share (LES) formula, the FFC gave an introduction, an overview of the local government fiscal framework, the evolution of LES, previous FFC recommendations and inputs, an overview of current formula, FFC analytical tools for the Local Government Equitable Share, as well as some practical illustrations. The LES had derived its origin from Sections 214 and 227 of the Constitution. It was unconditional with the purpose of assisting municipalities to fulfill their constitutional mandates.  Its composition was noted, as well as the LG fiscal framework and its components. The importance of expenditure equalisation was highlighted. FFC said that the best way forward with the LES was in the definition of elements of the results chain from financial inputs to physical outputs, outcomes and development impacts that would require non-financial data to measure effectiveness and efficiency. Another way forward was to assist with the development of the capacity of the Parliamentary Budget Office (PBO).

The third presentation related to Conditional Grants, and gave a background, financial and non-financial performance measures, monitoring and evaluation mechanisms and capacity, as well as making some conclusions and suggesting the way forward. FFC said that conditional grants were the main fiscal tool for national policy. This year the FFC would report regularly to Parliament on its assessment in terms of the Section 32 reports as tabled by the National Treasury and national departments.

The Costed Norms Approach was tabled to the Committee. The Costed Norms Approach was described as an instrument for the allocation of financial resources. It was defined as a ‘formula based method for calculating the financial resources necessary for the provision of basic social service levels, given nationally mandated norms and standards’. The reasons for using the Costed Norms Approach for the “S” Grant were highlighted as well as three broad implementation steps.

FFC then tabled a budget analysis to the Committee, setting out an introduction, definitions and indicators, the Budget process and outputs, a situational analysis, medium term trends and Budget analysis for provinces in 2010. Finally, conclusions were drawn and a way forward was suggested. The FFC had concluded that government revenue tended to be pro-cyclical and at municipal level may exaggerate the business cycle on local economies. It was also concluded that governments ensured a relatively stable growth pattern for personnel and essential goods and services. Education and health at provincial level, and water and sanitation at municipal level, were more consistently funded with stable growth patterns. FFC also concluded that with all levels of government, capital spending was the first to be cut during recessionary times, but that it was most likely to be increased during the boom.

The way forward pertaining to the FFC assisting with the development of the capacity of the Parliamentary Budget Office (PBO) was noted. Analyzing linkages between policy objectives, legal framework, governance capacity, developmental impact, service delivery levels and accountability mechanisms were emphasized in the presentation.

Meeting report

Financial and Fiscal Commission (FFC): Workshop presentations
Fiscal Transfers – Provincial Equitable Share (PES)
Mr Eddie Rakabe, Financial and Fiscal Commission, delivered the presentation on Provincial Equitable Share (PES) to the Committee. At the outset, however, he gave an overview of the background to the Financial and Fiscal Commission (FFC), noting that it was established in terms of the 1996 Constitution through the Financial and Fiscal Commission Act. Its role, powers and function were identified in the workshop.

The Commission’s key function was to consider the annual division of revenue between the three spheres of government. The FFC also had the mandate to consider any other conditional or unconditional allocations to provinces or local government. Constitutional imperatives in terms of Sections 217 and 214 (2) (a-j) were highlighted. The FFC's Institutional Framework was also highlighted. I

Mr Rakabe went on to describe the general economic rationale behind grants. He noted that these were necessary to ensure the fiscal health of provinces. Dominant sources of revenue for sub-national governments were true for the South African provinces. The vertical gap, as well as horizontal gap, regarding economic rationale and redistribution was noted. Grants were classified into two categories - namely Unconditional and Conditional. Conditional grants comprised Matching, Non Matching and Block grants.

The Provincial Equitable Share (PES) was both unconditional and non-matching. The methodology for distributing grants was emphasised. It was noted that several methods of allocating transfers were available. Mr Rakabe emphasised the principles of good transfer. He tabled the background of the PES to the Committee. He also tabled the FFC’s analytical framework for the PES. A historical background of PES was given, as well as an overview of the current structure of PES/Horizontal division (see attached presentation for details).

The current PES structure/Horizontal division comprised six components with associated weights. These components were education (51%), health (26%), basic (14%), institutional (5%), poverty (3%), and economic output (1%). Mr Rakabe tabled a breakdown on determining the PES pool as well as the PES Formula/Model and how it worked.

The phasing in of the equitable division over the 2010 Medium Term Expenditure Framework (MTEF) and the effect of data updates was noted. The review and the results of the review were noted as well as the options for reform. 

Discussion
Mr M Makhubela (COPE, Limpopo Province) was concerned that Gauteng was doing so well regarding services, whilst provinces like the Eastern Cape and Limpopo were doing poorly. He wanted to know if an initial study had been conducted by the FFC as to why this was so, and if monitoring was being done to keep the provinces on par with each other regarding services.

Mr Bongani Khumalo, Deputy Chairperson,  FFC, said that the FFC assumed that the demarcation board had done those studies. He added that they might not have been comprehensive at first, and that the current demarcation reviews that were currently taking place were as a response to that. Mr Khumalo said that there was an objective process that had been followed as a result of the issue of certain provinces doing poorly. He referred to the PES backlog component, and noted that the component was meant to try to subtract the poor provinces. The early discussions had been about rural components and the extent of poverty had not been adequately captured, but Mr Khumalo said that there was more information pertaining to that now. 

Mr T Chaane (ANC, North West) wanted to know at what stage the FFC got involved in the process of budgeting, particularly around the Division of Revenue.

Mr Khumalo responded that the FFC was involved in the process of budgeting from the beginning. He said that the FFC was involved in the process when it tabled its recommendations. These would be tabled at the end of April in respect of the Division of Revenue. The process involved intricate interaction with the National Treasury (NT), who was the primary or key driver in the budgetary process. He said that the National Treasury held, at every step, a division of revenue workshop, as well as strategic planning exercises and that the FFC was an integral part of that. The FFC was not involved in the decisions made by the National Treasury, but it was part and parcel of the process and principles. 

Mr Chaane wanted the FFC to give him an example of a matching and non-matching grant. He also wanted to know if the provinces followed the same formula for the distribution and allocation of their own revenue for their own departments.

Mr Rakabe responded that with a matching grant, national government would say to the province that every rand spent should be spent, for instance, on infrastructure or something similar. A matching grant would be a specific conditional allocation. An un-matching grant would be the opposite and would thus be an unconditional allocation. 

Mr Chaane referred to slide 22 of the workshop presentation and asked if the figures that were used were real figures quoting the actual numbers of people who had or did not have medical aid.

Mr Rakabe said that the figures in slide 22 were real, and were derived from Statistics South Africa (Stats-SA)

The Committee Chairperson as well as Mr S Mazosiwe (ANC, Western Cape) displayed concern about the age of the figures.

Mr V Makinta of the FFC emphasized that the figures were the latest figures derived from a full census.

Mr B Mashile (ANC, Mpumalanga) displayed an interest in the fiscal gap and the equalisation grant. He wanted to know how the formula would assist to generate activity where poor provinces had less fiscal capacity. He said that it appeared that the formula just sustained the status , and that it should move towards self sustainability instead.

Mr Mashile was concerned about the provision of equitable shares to provinces. He said that it appeared that provinces could do as they pleased with what was being allocated to them. He gave an example of the health sector, asking what would happen if an allocation was made to a province relative to its equitable share on health, but the province utilised the funds for something else. He said that that would be negating national priorities. He wanted to know how the FFC could ensure that national priorities were carried through into the provinces.

Mr Khumalo noted that the matching of national priorities at provincial level was a big issue and that it remained a challenge.

Mr Rakabe said that the PES’s function was to distribute funds across the provinces. Once the funds reached the provinces it was the function of the Executive to allocate those funds accordingly. Mr Rakabe said that there was no formula or guideline used to make allocations at that level. Although it was a function of the Executive, it was also an issue of priorities. He said that provinces needed to take into consideration the priorities set by national government, but that it was ultimately an executive decision.

A National Treasury spokeswoman said that the National Treasury had made observations, based on draft budgets, that there had been better alignment by provinces who were giving better consideration to the priorities set by national government. She added that there had been greater alignment also for the additional priorities, as the provinces got an inflationary adjustment. She said that in regard to co-operative governance, the National Treasury made recommendations to the Executive to implement. She concluded however, that it was not something that the National Treasury could control. 

Mr Mashile said that he did not understand how the provinces could argue against national priorities. He displayed concern for provinces like Mpumalanga and the North-West, where administrative resources had to be severely stretched. He added that those administrative costs added to the burden on expenditure for management and administration. He asked how this could be factored into the expenditure, especially for the poorer provinces. He added that certain municipalities needed to have regional offices and that that could be deemed as an additional expenditure.

Mr S Mazosiwe (ANC, Eastern Cape) made reference to a previous discussion with National Treasury around the issue of costed norms. He wanted to know if there was any progress around that issue, especially in the Eastern Cape.

Mr Khumalo said that, following recommendations, the National Treasury had agreed to set up a task team to review those recommendations. He added that the issue of costed norms required sectoral information.

Mr Mazosiwe noted the Education Component and added that there was always the problem of school going children who were over age. He wanted to know if there had been any discussion around that.

Mr Khumalo said that the issue of out of age learners derived from 2002, when the FFC was dealing with the equitable share formula and the Education Component at that time. There had been some people sending their children to school at a very early age because of Early Childhood Development programmes being integrated into the schooling system. On the other hand, there were also children who were unable to go to school at an early age, due to unforeseen circumstances. A system of enrolment was then brought into existence, where there was no distinguishing between children of the correct school age and those out of age. Mr Khumalo added that enrolment was not perfect but that it was a way to de-sensitise people from sending their children to school at too early an age. He added that this had started off as a Conditional Grant, which later became known as Grade R.

Mr Mazosiwe said that it was the job of the Committee to monitor conditional grants. He asked the FFC if there was anything that it could do to ensure that conditional grants were spent in the manner that they should be, and that the proper business plans were submitted.

The Chairperson said that a later presentation by Ms Ntenga should address these issues.

Fiscal Transfers – Local Government Equitable Share (LES)
Mr Jugal Mahabir, Financial and Fiscal Commission, tabled a presentation on the Local Government Equitable Share (LES) formula to the Committee. This presentation comprised an introduction, an overview of the local government fiscal framework, a history of the evolution of LES, previous FFC recommendations and inputs, an overview of the current formula, FFC’s analytical tools for LES, as well as some practical illustrations.

The LES had derived its origin from Sections 214 and 227 of the Constitution. It was unconditional, and had the purpose of assisting municipalities to fulfill their constitutional mandates.  Its composition was noted, as well as the LG fiscal framework and its components. The importance of expenditure equalisation was highlighted.

With regards to the evolution of LES, changes had to account for the costs of data updates, an increased demand for basic services, transformation and policies. The FFC’s previous formula for 2004, that was approved by Cabinet during 1998, was tabled. According to the 2004 review of the formula, there were numerous shortcomings. These partially arose because the formula had been complicated, was not flexible enough to cater for new policies, had been non transparent, and the window of funding had been insufficient.

The FFC’s previous recommendations and inputs into the current formula were tabled. Main features of the LES formula were emphasised. The purpose of the LES formula’s Basic Services Component was to enable municipalities to provide basic services as well as free basic services. The Basic Services Component was supportive of households earning less than R800 per month. It was in recognition of water reticulation, sanitation, electricity reticulation, refuse removal and environmental health. The Basic Services Component had highlighted the distinction between poor households that had been serviced and those that had not been serviced.

Institutional Support with regards to the LES was emphasised. It was noted that Institutional Support supplemented the funding of a municipality for administrative and government cost. It was also deemed to be an avenue to all municipalities. Mr Mahabir noted that Institutional Support assumed high economies of scale in local administration with an increased population. Mr Mahabir tabled the Institutional Component with its composition to the Committee. The Revenue Raising Component was also tabled, as well as changes in allocation shares for 2002-2012.

Technical design issues in terms of measures of poverty, data updates, the Basic Services component, the institutional component, the revenue raising component and the development component were highlighted.

The LES and its broader local government policy, as well as the LES simulation model, were tabled to the Committee. The LES Simulation Model was developed in 2009 to assist the LES review. It depicted data on specific municipalities. It also analysed changes to preset parameters.

The changes analysed and categorized per municipality pertained to special characteristics and density, poor households, income, census and the 2004 gross value added (economic activity).

An overview of practical illustrations was communicated to the Committee. The way forward regarding LES lay in the definition of elements of the results chain from financial inputs to physical outputs, outcomes and development impacts that would require non-financial data to measure effectiveness and efficiency. Another way forward was to assist with the development of the capacity of the Parliamentary Budget Office (PBO).

Fiscal Transfers – Conditional Grants
Ms Lydia Ntenga, Financial and Fiscal Commission, delivered her presentation on Conditional Grants to the Committee. The paper gave a background, financial and non-financial performance measures, monitoring and evaluation mechanisms and capacity, as well as a conclusion and way forward. She said that conditional grants were the main fiscal tool for national policy. Between 2005/06 and 2009/10 the share of provincial and municipal revenue from conditional grants had escalated from 11.8% to 19.1% for provinces, and from 7.7% to 14% for local government.

Conditional grants were used to address national priorities such as infrastructure grants, school nutrition programmes and the HIV/Aids grant. They were also used to deal with the horizontal and vertical fiscal spillovers or externalities, like the National Tertiary Services Grant and the Health Professionals Training Grant.

The proliferation of grants, as well as the consistency in the design of grants, was communicated to the Committee. It terms of criteria for the allocation of conditional grants, it was noted that the horizontal division between provinces and municipalities was based on measures like total population, population in poverty or the size of the economy, and that these were dependent on the objectives of the grant.

Ms Ntenga said that future budgets could be made either according to an independent costing of planned outputs, or based on inflationary adjustments.

It terms of performance measures, Ms Ntenga noted that there was a need to contextualize financial and non-financial data. She said that the criteria for allocating future budgets were not clear, and that there was a need for a reliable financial costing model. She added that many conditional grants either lacked or had inconsistent measures around non-financial performance. It was suggested that Parliament should monitor and also enforce non-financial reporting mechanisms.

Ms Ntenga added that departments should at least require or provide measures of the number of beneficiaries, and of physical outputs like buildings, other goods and services and staff, when dealing with non-financial measuring.  She emphasised the importance of the provision of measures of socio-economic impact.

The challenges in conducting effective monitoring of grant performance were emphasised. The challenges pertained to systems and capacity problems, staff and skills for the evaluation and monitoring of performance, as well as the availability of non-financial data. It was noted that effective monitoring needed appropriate non-financial mechanisms to be put in place.

Ms Ntenga noted the way forward as well as conclusions to the Committee (see attached presentation for details). She said that, from this year, the FFC would report regularly to Parliament on its assessment in terms of the Section 32 reports as tabled by the National Treasury and national departments.

Costed Norms
The Costed Norms Approach was tabled to the Committee. The Costed Norms Approach was described as an instrument for the allocation of financial resources. It was defined as a ‘formula based method for calculating the financial resources necessary for the provision of basic social service levels, given nationally mandated norms and standards’. The reasons for using the Costed Norms Approach for the “S” Grant were highlighted, as well as three broad implementation steps.

Key recommendations were noted in the presentation. It was said that the Provincial Equitable Share should provide for constitutionally mandated basic levels of social service provision and that provinces should be held accountable for the delivery of those services.

It was noted that the FFC had used the Costed Norms Approach to derive the formula for basic education, health services and welfare. It was recommended that each province be allocated a basic (B) Element, which would include the provision of services not defined as constitutionally mandated basic services.

It was then suggested that each province should be allocated an Institutional Element set, equal to the minimum cost of the operating government institution. Due to need, it was said that the national conditional grant should be allocated to provinces, for the support of the reduction of the social infrastructure backlog.
The costed norms approach, regarding the social sector components in terms of Education and Learner Groups, was emphasised.

Budgets and Budget Analysis
Mr Conrad van Gass, Financial and Fiscal Commission, tabled a budget analysis to the Committee.  He gave an introduction, definitions and indicators, an outline of the budget process and outputs, a situational analysis, medium term trends, and the budget analysis for provinces in 2010, as well as stating some conclusions and the way forward.

Mr van Gass tabled a brief overview of the budget analysis. He said that, with the financial data available, a review of past trends which would also affect future budget needs and policy priorities took place. Budget summaries and examinations of completeness, accuracy and conformance took place as well. Testifying before examining and fund granting bodies was made possible with the availability of financial data.  An analysis, with the availability of non-financial data, was also noted.

An introduction of the FFC’s Budget Analysis Unit was tabled to the Committee. Its objective was to assist Parliamentary finance and appropriations committees to understand, review and suggest amendments to short-and-medium term budgets.

FFC’s philosophy pertained to budget legibility and transparency for institutions that were held accountable.  Mr van Gass tabled the nature of recommendations to the Committee.

With regards to definitions and indicators, Mr van Gass defined what was meant by medium to long term, as well as short term. He put an emphasis on the Budget process and its products. Medium-term trends and forecasts for a situational analysis were given. Mr van Gass also noted the medium-term trends and forecasts for provincial and municipal governments in terms of funding and spending.

It was concluded that government revenue tended to be pro-cyclical, and at municipal level may exaggerate the business cycle on local economies. It was also concluded that governments ensured a relatively stable growth pattern for personnel and essential goods and services. Education and health at provincial level, and water and sanitation at municipal level, were more consistently funded with stable growth patterns.

It was concluded that with all levels of government, capital spending was the first to be cut during recessionary times, but that it was most likely to be increased during the boom.

The way forward pertaining to the FFC assisting with the development of the capacity of the Parliamentary Budget Office (PBO) was noted. An analysis of linkages between policy objectives, legal framework, governance capacity, developmental impact, service delivery levels and accountability mechanisms was emphasised.

Discussion
Mr Mashile referred to Ms Ntenga’s presentation and her reference to staff and the issue of skills challenges. He enquired if there was any plan put into place to address and rectify the issue.

Ms Ntenga responded that if a Conditional Grant was introduced, a Department was required to submit a business plan setting out how the Conditional Grant would be implemented. The FFC expected the business plan to have an indication of additional staff needed as well as the proper costing for that.

With regards to the issue of skills, Ms Ntenga said that the FFC would have to decide if there was a need to train staff, in terms of implementing the new policy. All this would have to be tabled in a business plan and submitted to National Treasury. National Treasury would then have to look at it and see if proper projections had been made.

Mr Mashile made reference to the FFC’s budget analysis and its conclusions. He wanted clarity with regard to paragraph 7.1. He added that the workshop had put forward a lot of information and that this one meeting was simply not enough time for adequate engagement. He requested that an additional meeting between the Committee and the FFC be held.

Mr van Gass said that government formed part of the economy and if government spending was growing faster than the economy it would accelerate growth. If government was cutting back or spending faster than the economy was climbing, it would also tend to push growth down. Mr van Gass noted that if government was spending more or less than the growth of the economy, it could make the cycle more pronounced. He said that the intention was to make the cycle less pronounced. 

Mr Mashile noted the issue in relation to the fiscal gap and the manner in which it was viewed and addressed. He asked if it was meant to sustain or be developmental in nature. He wanted to know if his view on that was in line with the view of the FFC.

Mr Khumalo responded that it was necessary to decide where the system needed to be directed. He said that South Africa was a fiscally decentralised unitary State, and that the system was the outcome of a negotiated process. He added that the gap was a result of the confinement of powers. He said that in any fiscally decentralised system, the two would be closely linked. The fiscal gap between national and provincial government was huge in relation to local government, due to the nature of the services rendered by local government. He noted the horizontal gap in the local government sphere, and added that the biggest gap was the vertical gap in the provinces and at national level. He said that the assignment of revenue sources as opposed to spending responsibilities had become an issue, because it was a matter of control. He referred to the first set of recommendations, when he noted the evolution of the system.

Mr Khumalo said that the problem was bigger than simply allowing the provinces to raise their own revenue. There was a need to look at the system and take deliberate political decisions in terms of where the FFC wanted the system’s projects to go. He noted that the problem of the vertical fiscal gap would seemingly always persist. 

Mr Mashile said that there was still insistence on using income levels of R800 per month. He wanted to know if that insistence was not posing a disadvantage to poor rural provinces and municipalities.

Mr Mahabir said that using the R800 per month in the formula would pose a disadvantage to some people, but added that the data used in the formula had not been updated and that those who used to earn R800 could now be at another earning threshold, for instance, R1200. The data being used in the current formula was taken from 2001, and even though salaries might have increased, those people were still covered in the formula.

Mr Mahabir added that the problem would arise when there was a need to update following the 2011 census. He said that there would then be a review of the poverty measures. Stats SA was currently busy with something that could help with improving the measurement of poverty.

The National Treasury spokesperson said that if there was to be an increase of the income level on the formula, it would create severe distortion. He said that it was not desirable to change the income measures, in the absence of a more comprehensive review of the overall formula at this stage.

With regard to Conditional Grants, Mr Mashile said that provinces were reporting on expenditure only after they had transferred the funds to implementing agencies like municipalities or non governmental organisations (NGOs), but that those funds were not necessarily being spent on the ground. He added that those funds should have been translated into a real service, and not just transferred to the banking account of an implementing agency.

Ms Ntenga said that, in terms of intervention, when municipalities received allocations for Conditional Grants, they were also required to provide their own cash flow projection. She said that a provincial department should be able to monitor a municipality’s spending and that it was a government mechanism that could be used to ensure that the money was being spent on Conditional Grants. She added that any another issue was that the provinces did not have a framework for the assessment of those Conditional Grants.

The National Treasury spokesperson said that this issue had been problematic for some time, particularly with grants such as the Community Libraries Grant and the Human Settlement Grant. He said that the National Treasury had engaged with the provinces and provincial treasuries. A cash flow agreement or agreement between provinces and municipalities was recommended by the National Treasury. The National Treasury was also of the stance that because this was a national grant, the current stipulation that the funds had to be returned if they remained unspent should remain in place. The province had to communicate and clearly set out that rule to its municipalities.  

Mr van Gass said that National Treasury was aware of fiscal dumping. National Treasury had specified, in the Budget formula, which transfers should go where. He noted that the Committee could investigate the transfers through in-year monitoring, so that if spending spikes were noticeable at the end of the year it could be seen that fiscal dumping had occurred. 

Mr van Gass also said that it should be made a requirement that all those receiving government money had to report on what they were delivering. He added that that was just part of a broader solution.

Mr Mashile asked the FFC if it had looked into the tradition of the Budget process of National Treasury in relation to the Money Bills Procedure and Related Matters Act. If so, he wanted to know if the FFC had any views on areas that needed to be changed or reviewed.

Mr van Gass said that the FFC had noticed, when analysing the Parliamentary schedule against the Budget process, that there was a sticking point regarding the adjustments of Budgets.

Mr T Harris (DA, Western Cape) made reference to the LES workshop, and the designation of district municipalities without powers and functions. He wanted to know on what money was being spent, if there were no powers and functions.

Mr Mahabir said that those municipalities were without functions and powers, with regards to services like electricity, water and sanitation. The powers and functions that the municipalities did have pertained to fire fighting services, and similar services. He added that the National Treasury was busy with a mechanism that dealt with the fact that some of those municipalities had more powers and functions than others.

With regard to the breakdown on the Basic Services Component, Mr Harris questioned the formula for municipalities. He wanted to know why, as matters became more rural, the sanitation component had dropped so drastically, in relation to the electricity subsidy; with the refuse subsidy remaining stable.

Mr Mahabir said that the backlog formula that had been used was based on a 2001 census. He said that in 2001 there had been a large number of homes in rural municipalities that did not have a direct connection to sanitation.

With regard to the Revenue Raising Component, Mr Harris noted that the Fuel Levy had replaced the Regional Services Council (RSC) Levy. He added that those rates were different, and wanted the FFC to explain what had occurred when the transition had occurred.

Mr Mahabir said that the amount of funds that had been raised for the RSC levy was very large, and when the fuel levy was introduced there had been a huge shock into the system. The National Treasury had phased in the shock within three years. He noted that there had been no major shifts in allocations with the fuel levy due to this.

Mr Harris said that the FFC often spoke of the role of the metros in economic development. He asked the FFC to expand on that, and asked what the implications were for the formulas.

Mr Mahabir said that the cities played a huge role in macro economic development. He noted the percentage of the country’s Gross Domestic Profit (GDP) that went to municipalities. He said that the level at which municipalities grew affected the country’s economy in general. He suggested investments.

Mr Harris said that, in regard to the Conditional Grants workshop, the presentation had noted that equitable shares had been carved up to make Conditional Grants. He noted that the FFC had always been critical of that, and that the problem with the criticism was that there were poor municipalities or ineffective municipalities that were not spending the money properly, which gave rise to the need to carve up the equitable share. However, on the other hand, the autonomy of better functioning municipalities had been compromised. He wanted to know how the FFC proposed dealing with the issue, as it was consistently critical.

Mr Harris wanted the FFC to explain the spill overs associated with the vertical and horizontal splits. He wanted to know how a spill over was diagnosed.

Ms Ntenga said that she was referring to spill overs resulting from services provided by National Government to support capacity building and structural adjustments within the recipient administration.

Mr Khumalo added that in relation to spill overs, certain services were provided and were made available only in certain provinces, like tertiary health facilities. He added that because the FFC’s formula was so people and demographically-driven, this resulted in people from Gauteng going to other provinces to access a specific healthcare service, and then there was a need to compensate. He said that Conditional Grants would be in existence as long as there were disparities in the types of services provided for the different provinces. Those services that were not available had obviously spilled over into the other provinces. The types of Conditional Grants pertaining to spill-overs were identified by Mr Khumalo. 

The FFC’s idea of establishing linkages between equitable shares and capital grants was also noted by Mr Harris. He wanted to know how the FFC proposed linking the two transfers.

Mr van Gass said that the FFC was specifically talking about capital grants, such as the municipal infrastructure grant and the housing grant, and he diversified. He added that there was no link between a capital grant and a maintenance operating grant which was covered in the equitable share.

Mr Harris noted that the FFC had also spoken of deficits in relation to staff and skills to evaluate and monitor performance. He wanted to know who would have oversight for those Conditional Grants, and whether this would be the departments themselves, Provincial Treasuries or the National Treasury.

Ms Ntenga said that National Treasury should play a role in terms of ensuring that there was funding for additional staff, and that the National Treasury also needed to look at business plans for provinces. She added that Parliament could also have an oversight role when engaging with the provinces on their business plans. She said that Parliament could play an influencing role with this regard.

Mr Harris said, in regard to the FFC’s budget analysis, that the Budget Review document itself often announced new policy directions and then sometimes that was not followed up. He wanted to know if the FFC had also noticed that occurrence.

Mr van Gass said that the FFC had indeed noticed the occurrence. He said that generally it took two to three years to implement a policy change and that it took probably a year before it was reflected in a Budget. Only in the following two years would this translate into being reflected in spending, implementation and delivery. Mr van Gass added as an example that in the Budget Review there had been a proposal for employers to employ the youth.

Mr Harris said that he had asked National Treasury, during the previous week, when it was speaking of the difference between saving and under-spending, whether it was not in fact possible to say that under-spending was now a saving. He asked the FFC if it was a risk that FFC was  re-branding on spending.

Mr van Gass said that the main difference was that under-spending was unplanned by the department, whereas savings would be planned. He added that savings entailed cutting back on unnecessary administrative costs, transport and conferences, as opposed to looking at basic spending.

Mr van Gass concluded that if a planned capital project was not spent it would be deemed as roll over and if it was unplanned it would be deemed as under-spending.

Mr Harris referred to the attempts to get the provinces to raise their own revenue. He disagreed that there had been no attempt to do so, as the South African Revenue Services (SARS) had not let go of any national revenue. He asked the FFC to justify that statement.

Mr Harris said that the FFC had spoken of the provinces generating deficits. He said that he was interested in the history and mechanism in dealing with those debts. He wanted to know if the provinces were just expected to manage their debt by utilising their equitable share. He asked what the risks were when provincial deficit debt management got out of control. He wanted to know if national intervention would ensure if those provinces could not pay back their debt.

Mr van Gass said there had been a history with regards to provinces generating deficits. In 1996 to1997 the provinces had been overspending with regard to education and health. He made reference to the Public Finance Management Act (PFMA) and its intervention with regard to national government taking over provincial government finances.

Mr Harris displayed concern over some of the FFC’s definitions that were used in the Budget Analysis presentation. He said that in Section 5.2 of the presentation, which had referred to spending of provincial governments, the FFC had stipulated that capital was pro-cyclical, and served as a shock absorber. Mr Harris said that he thought that statement was a contradiction. Mr Harris said that the shock absorber would be counter cyclical expenditure, and that pro-cyclic expenditure would worsen the shock.

Mr van Gass said that the statement and the term had been relative, and intended to mean that as much as sub-national and municipal governments were there to provide basic services, that should be seen in relation to other matters. South Africa had followed a more stable growth path and had been absorbed from the shock of a cut back in revenue. He added that if the country were to see government’s response for capital spending, then that would be the opposite of a shock absorber.  He concluded that his statement was used as a relative term.

Mr Harris wanted to know if the FFC had any explanations for the huge wage increases. He made reference to point 6.2 of the Budget Analysis presentation, which stated that personnel constituted nearly 25% of municipal spend and that budgeted wage restraints over the medium-term did not stop the trend. Mr Harris said that the FFC seemed to indicate in the presentation that these did in fact stop the trend but otherwise they were disagreeing. He wanted clarity on that potential contradiction.

Mr van Gass agreed that the sentence had been complex. He said that “wage restraints” referred to municipalities budgeting for relatively low increase in wages, in comparison to provincial and national government. However, he added that personnel spending was still growing faster than the average for municipal spending, which was why its share had been rising. Mr van Gass added that the share was rising very slowly.

Mr van Gass concluded that the municipalities had been budgeting for wage restraints but that this was not happening in the provincial sphere. 

The meeting was adjourned.


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