Financial and Fiscal Commission (FFC) recommendations on 2011/12 Division of Revenue

Standing Committee on Appropriations

01 June 2010
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The presentation was focused on government interventions during the global economic crisis. The Financial and Fiscal Commission said that households benefited immensely from government’s social security programme. The programme had received R85 billion, 42% of the total budget. The structure of inter-governmental relations was not working efficiently, leading to the failure of certain government programmes reach as many people as possible. Most municipalities had challenges in raising revenue and keeping proper financial records. It was suggested that municipalities needed to be supported by provincial and national governments, especially in areas of concurrent functions. There were concerns about the lack of coordination by different stake holders, leading to Treasury terminating certain conditional grants despite the need to continue providing such grants. Public transport had a significant increase in budget allocation. Programmes that received priority under public transport grant were bus subsidies, new road and railway construction and the maintenance and the upgrading of stations. There were still challenges which included lack of coordination between provincial and local government over areas of concurrent functions. The FFC recommended that social security measures needed to be maintained because they had proven to have worked very well. However, it did nor reccommend a universal income grant because it was unaffordable. Greater co-ordination between different stakeholders was encouraged. Members of the Committee asked questions probing how the relationship between the municipalities and provincial governments could be strengthened. They were concerned that social assistance fell too short from addressing the challenges of poverty in the country. The FFC suggested that more emphasis should be placed on improving efficiency and effectively in utilising the available resources.

Meeting report

The Chairperson welcomed the delegation from the Financial and Fiscal Commission (FFC). Before handing over to Dr Setai and his team, the Chairperson raised a concern about a rumour that the conditional grant for the electrification and water provision of schools had been stopped. He was not convinced that all the schools had been electrified and had clean water and sanitation. The relevant departments would be invited to come before the Committee and explain if indeed every rural school had been electrified and the children had access to clean water and sanitation.

Introduction by Financial and Fiscal Commission Chairperson
Mr Bethuel Setai, Chairperson: FFC explained to the Committee that his organisation was constituted in terms of section 220 of the Constitution. It had a mandate to make certain recommendations ten months prior to the tabling of the next Division of Revenue Bill and the Budget.

Fiscal Framework and Vulnerability
Mr Bongani Khumalo, Deputy Chairperson: FFC, presented a number of recommendations. The aim was to protect the vulnerable sections of society, that is, the elderly and children in the midst of the global economic recession. The South African economy remained very susceptible to global influences. Sectors such as tourism were severely affected by the global economic recession. Due to a recent rise in unemployment, households were left with very little to take them through and it was paramount that the State increased its social assistance programme. Other programmes which the State needed to invest in, closely linked to the social assistance programme was school nutrition and the provision of a strong primary health care system. The Government was praised for taking stronger measures which ensured that the poor, vulnerable and the marginalised were cushioned during the recession. It was strongly recommended that the interventions of the state were very much to the point and that they needed to be maintained. Government programmes such as those aimed at creating jobs, giving access to education, infrastructure maintenance were identified as key to building a better life for all.
The Commission discouraged the giving of a universal income grant, which it deemed unaffordable as it needed to be accompanied by a broader restructuring of the entitlement system.

Social Assistance Reform during a Period of Fiscal Stress

Mr Vincent Makinta
(Programme Manager for Intergovernmental Relations) said that social security grants were used, during recession, to fight poverty and had proved to have played a major role in that regard. The Government had enough resources to finance the social security grants, thanks to the improved tax collection regime of the post 1994 era. Social security allocation from the Treasury was at 42% of the total budget (R85 billion), second highest to education. There was no evidence to suggest that a lot of people who received the grants had squandered them. However there were instances of corruption where certain government officials were unduly receiving those grants. The recommendation was that the current social assistance programmes needed to be maintained. A further recommendation was to introduce pilot conditional cash transfer and workfare programmes on a small scale which, if successful, would be expanded to a large scale programme.

Review of the South African Inter-Governmental Fiscal Relations
The FFC had conducted a 10 year study, which focused on reviewing the conditional fiscal transfers to provincial governments and municipalities. They observed that there seemed to be no policy guidelines for the introduction and termination of certain conditional grants. The allocation itself was often done in an ad hoc and incremental fashion. Allocations for some conditional grants had been terminated for reasons unknown to the Commission while others had existed for more than five years. While National Treasury had provided some guidelines, those were not followed very effectively and had been inconsistently applied. A call was made for more transparent criteria to be used in allocating conditional grants. Such criteria, measures and baselines needed to be generally accepted throughout government to permit rigorous benchmarking of performance and evaluation of effect.

It was recommended that when introducing and terminating conditional grants, the national department must i
ntroduce a mandatory, systematic process for designing and planning individual conditional grants. The process must cover incentive effects, administrative accountability arrangements, stipulated regular review periods to ensure there was an independent evaluation of grant performance at entry, midterm and end of grant. Government should make the criteria for dividing grant allocations as transparent as possible. At the moment, these were only explicitly reflected for the whole programme and not for each individual grant.

Local government was urged to embark on strategies that would raise its revenue and decrease fiscal stress. The perception that municipalities were fiscally stressed needed to be dispelled as not all municipalities fell into that category. The major challenges identified were that a number of municipalities were showing chronic signs of fiscal stress that had a potential to cripple the entire local government system. A combination of growing inability and unwillingness to collect revenues by municipalities or to pay by residents impacted negatively on the future of local governments.

Intergovernmental Fiscal Issues in Urban Public Transport
The FFC reported that not only had there been a significant increase in public spending on transport in recent years, but the inter-governmental fiscal system had also been very instrumental in much of that expenditure. Key items included ongoing bus subsidies, the Gautrain and the new bus rapid transit system in cities such as Johannesburg and Cape Town. Most public funding on transport, with the exception of Gautrain, originated from national government. The national and provincial governments jointly funded Gautrain. The need for better
coordination between different transport modes was emphasised. Local government spent its allocation on subsidies to commuter bus system, construction and maintenance of municipal roads and streets within their areas of jurisdictions. The main recommendations were that the Department of Transport, National Treasury and other key stakeholders should review the current mechanisms and basis for distributing transport subsidies. This would be to promote the efficiency and equity of urban transport and land use systems and to work towards aligned and coordinated infrastructure investment project plans between Passenger Rail Agency of South Africa (PRASA) and cities.

Discussion

Mr M Swarts (DA) asked whether the FFC had considered any alternative means of raising revenue by the municipalities since it had been shown that they were in deep fiscal stress. The decision to take away municipalities’ ability to provide and charge for electricity was cited as another blow to the municipalities’ source of revenue.

Dr P Rabie (DA) said the social grant system was indeed a necessary move. From a total of eleven million unemployed South African, over 60% of those received social assistance and were between the ages 18 to 35. Had the FFC suggested any measures to address those individuals, especially the youth, to be able to participate in the economy?

Dr Setai said one of the interventions that they were putting forward was introducing the concept of workfare programmes. Workfare programmes, which entailed the youth in particular, meant that instead of being handed social grants while looking for work, they were put into programmes where they would do some work for the benefit of the communities they lived in. Certain activities could even be structured in a way so that there would be transfer of skills to those unemployed youth.

Dr Rabie asked if Dr Setai could confirm a rumour that was circulating that certain municipalities used conditional grants to service their current accounts with banks rather than use them for the purpose they were granted.

Ms Ngcobo asked if there was still a need to have Category Three municipalities or was their existence an unnecessary waste of resources.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning Unit, National Treasury, came out strongly in support of retaining Category Three municipalities. The reasons were that the district municipalities were much closer to the people and if capacitated properly, were the perfect engine to steer service delivery.

Mr J Gelderblom (ANC) asked if there had been any changes in the financial management capabilities of certain district municipalities. The National Treasury had been working closely with them but the Committee would appreciate knowing if there were any signs of improvements so far.

Ms T Ngcobo (ANC) asked what the ‘block grant’ was. She pointed out that the presentation had revealed a problem which the Committee had with the Treasury, Energy Department and Water Affairs Department. The problem was that according to Treasury, the conditional grant aimed at the electrification and provision of clean water and sanitation at rural schools had been completed. That seemed not to be the case based on the recommendations by the FFC and observations by Committee members during oversight visits.

Mr Khumalo explained that the block grant and the recommendations for it simply proposed that government should introduce a grant which had few conditions attached to it. It intended to give authorities room to identify priority areas which needed spending on in a particular critical area. Such a move would make it easier to implement decisions without having to go through a tedious process of red tape and bureaucracy involving seeking permission from Treasury for various forms of condonation. 

The Chairperson said he also was not clear as to what the block grant was and its implications. The recommendations on page 10 of the document suggested rolling out a pilot conditional cash transfer and workfare programmes. It also said the government should avoid giving a universal income grant. Those two recommendations needed to be clarified, especially how the two grants differed.

Mr Khumalo replied that the idea of workfare, if successful could have been tied together with Expanded Public Works Programme “to try and kill two birds with one stone”. Hence a grant would be given while at the same time a massive infrastructure investment initiative would be receiving adequate attention. 

Mr L Ramatlakane (COPE) was not convinced that there was adequate understanding of the roles to be played by both the local government and the provincial government in their concurrent functions in the provision and maintenance of roads. The National Land Transport Act was also not clear enough to draw the lines clearly.

Mr G Snell (ANC) asked how confident the FFC were with their recommendations and to say what impact those recommendations, if implemented, were likely to bring both socially and otherwise.

The Chairperson asked the FFC to tell if the giving of social grants was sustainable in the long run. At times one got the feeling that there were far too many people who needed grants and if the government was to give to each and every deserving household, the sustainability of the programme would be put into serious jeopardy.

Dr Setai replied that he was confident that if implemented, most of the recommendations were going to produce some positive results. This was especially taking into consideration that most of the recommendations did not ask for more money but rather for a more efficient way of providing a service and cushioning the poor.

The Chairperson raised concern that the presentation seemed to suggest that the way the government grants were being distributed was satisfactory and that it needed to be maintained. If members recalled, the Committee had hosted a delegation from the Human Sciences Research Council (HSRC) who had suggested that government social grant efforts were just “another way of scratching the surface of poverty” as there were many poor people who did not receive those grants due to a vast variety of reasons but who otherwise would have been entitled to them.

Mr Khumalo reiterated that the HSRC Report highlighted the point made by Dr Setai that there was a need to improve efficiency and effectiveness of certain programmes. If one looked at the size of the budget allocated to social security grants, it could not be entirely true that one was merely scratching the surface. However, what was true was that that money could be distributed even more efficiently to benefit its intended beneficiaries.

Mr D Mavundla (ANC) asked if there was a link between conditional grants for provision of transport and road maintenance and the issue of a subsidized school bus system. Did the Department of Education provide that subsidy or it was it to be funded by the overall allocation? 

Mr Tebogo Makube, Programme Manager: Fiscal Policy, FFC, said there was an ongoing debate in the area of public transport, school transport and the role of municipalities. In urban areas, public transport was not a challenge in terms of accessibility. Perhaps it was time for the provinces to step into the picture and help municipalities.

The Chairperson wondered if the National Development Agency was delivering on its mandate in moving people away from depending social grants. Due to time constraints, the Chairperson said his question would have to be answered in the next interaction with the FFC because it was clear that many issues had been left unattended in the discussion.

The meeting was adjourned.



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