Financial and Fiscal Commission Annual Report 2009/10 briefing

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Finance Standing Committee

12 October 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Commission’s primary mandate was to provide recommendations to the three spheres of government, as well as other state organs, on the division of revenue amongst them. A shortcoming of the Provincial Equitable Share formula, however, was that between 96% and 97% of allocations were driven by population numbers, which were based on long outdated 2001 census figures.

The Commission’s assessment of the global economic crisis’s impact on South Africa had proved accurate. Its recommendations for the implementation of a national infrastructure maintenance strategy, and the strengthening of social assistance programmes while reducing dependence on grants, had been accepted. However, it was a matter of concern that not much progress had been made in addressing road maintenance backlogs in 2010.

Recommendations of the Commission were not binding. However, the Minister was bound by law to give reasons for their acceptance or non-acceptance. The FFC could not ensure that accepted recommendations were actually implemented, and felt that this responsibility rested with Parliament.

Programmes aimed at municipal capacity building did not originate from the national or provincial government, but rather from single departments, and were not co-ordinated. In many cases, this led to confusion. The FFC had raised this issue in the past, and should probably take action again, but it had no authority to ask the government to improve co-ordination.

The Commission had introduced austerity measures in an attempt to free up resources for research, but more would be needed if it were to achieve its objective of expanding its activities into the provinces. It was noted that audit fees, which exceeded 5% of its budget, were higher than its commissioned research – part of the Commission’s core function.

The Commission was in the process of taking a new look at the provisions of the Financial and Fiscal Commission Act, in terms of what the Commission should actually be doing. The process had been triggered by discussions with the Minister of Finance, who had certain views on what the Act itself meant, and the relevance of its provisions.

Meeting report

Mr Bongani Khumalo, Acting Chairperson and Chief Executive Officer of the Financial and Fiscal Commission (FFC), described the Commission’s vision and mission, and said its primary mandate was to provide recommendations to the three spheres of government, as well as other state organs, on the division of revenue amongst them.

In 2008, the FFC had decided to adopt a new research strategy aimed at ensuring the issues that formed the basis of its work were still relevant. A review of its activities indicated the main focus had been on getting the revenue-sharing formula right. This was stretched to incorporate the impact of the system on the government’s developmental outcomes. The implementation of this new strategy in 2009 meant the Commission was able to adapt quickly to the government’s outcomes-based service delivery model. Budget analysis units were set up, and created world-class modelling capacity within the FFC, enabling it to share expertise with its international counterparts.

Partly as a result of this new strategy, the FFC was able to make a quick assessment of the impact of the global economic crisis on the South African economy, particularly on the most vulnerable sections, and made projections of where the economy was going and how it would respond to the shocks. The FFC was proud that these projections had proved very close to the actual situation.

Mr Khumalo said the Government had accepted certain recommendations made in 2009 with regard to Provincial Equitable Share (PES) principles. The FFC felt clarification was needed beyond what was stated in the Constitution, as there were no clear guidelines, for instance, as to what aspects of education were the responsibility of the national government, and what were the provinces’ responsibilities. If clear definitions of responsibility for providing services were not given, this could create problems with financing arrangements. The Government had indicated that this, and other recommendations, would be considered as part of a comprehensive review of the PES.

Recognising the effect of the recession, and Government’s role in cushioning its impact, the FFC had recommended the implementation of a national infrastructure maintenance strategy, and the strengthening of social assistance programmes while reducing dependence on grants. Although this had been accepted, it was a matter of concern that not much progress had been made in addressing road maintenance backlogs in 2010.

A number of initiatives had been introduced in the past year in an attempt to build capacity at municipal level. However, these efforts were unco-ordinated, and it was to be hoped that a joint approach would emanate from the various departments through the government’s current outcomes-based service delivery model.

Mr Mavuso Vokwana, Chief Financial Officer of the FFC, gave a summary of the Commission’s financial performance during the period under review.

Significant variances were noted in employee costs (up 16,1% owing to migration to the Department of Public Service and Administration (DPSA) structure); a 20% decline in depreciation costs (obsolete computer equipment); professional fees being reduced by 36% owing to financial constraints; the asset base shrinking by 50%; and cash flow dropping by 78% owing to an inadequate baseline allocation.

Expanding on the professional fees, he said these were made up of audit fees R1 398 755; commissioned research R899 616 and other consulting services R202 432.

Ms Tanya Ajam, an FFC commissioner, described the Commission as an “institution in transition.” Its members were giving considerable thought on how to do things better. It was a research-based organisation responsible for presenting evidence-based policies. Projects were chosen a year in advance, so the nature of most of its research was long-term. This meant it was unable to respond quickly when short-term needs arose, and certain necessary research projects had had to be scaled down and others put on hold, because of limited resources.

A concern for the FFC was that it could produce excellent research, but if no action was taken, its efforts were wasted.

She pointed out that the FFC was a small organisation, but had to comply with several pieces of legislation which had serious budget implications, such as audit fees, which exceeded 5% of its budget. Funding had been only marginally increased, and if the demand for policy advice, insight and research were to increase – as would be expected – the FFC would have capacity problems. It had introduced austerity measures in an attempt to free up resources for research, but more would be needed if it were to achieve its objective of expanding its activities into the provinces.

Discussion
Mr C de Beer (ANC, Northern Cape), Chairperson of the Select Committee on Finance and Appropriations, referred to a vacancy on the Commission after a national nominee had accepted the appointment, but had not taken it up since June 2009. He asked if this had affected the work of the FFC.

Mr Khumalo replied that from a research point of view, there had been no impact. The matter had been referred to the President and Minister for attention.

Mr N Koornhof (COPE) asked why travelling expenses were high in relation to the budget.

Mr Khumalo replied that most of the stakeholder interaction took place outside of Gauteng, such as work with provincial legislatures and Parliament in Cape Town, as well as wide-ranging research to gather information. The nature of the FFC’s work was not desktop-based.

Mr Koornhof referred to the strategic objectives in the Annual Report, which stated that a review of public hospitals performance and an evaluation of the national health insurance (NHI) proposals were planned, but that these had been put on hold. He asked if they would be resumed.

Mr Khumalo said this was related to the fact that these projects were initiated in March 2008, at which stage the proposed NHI was merely at the discussion stage. Some work had, in fact, been done on hospital performance, but the FFC was in a delicate financial situation, and putting these projects on hold was a necessary trade-off.

Dr Z Luyenge asked whether the recommendations submitted by the FFC were binding on the Government.

Mr Khumalo said the recommendations were not binding. However, the Minister was bound by law to give reasons for their acceptance or non-acceptance. The FFC could not ensure that accepted recommendations were actually implemented, and felt that this responsibility rested with Parliament.

Dr Luyenge said it was very clear that the three spheres of government were not working together in a spirit of co-operative governance when it came to infrastructural maintenance and social assistance. He asked what the FFC’s research revealed about a situation of continuous infrastructural decay, where funds earmarked for construction and maintenance of roads were being returned unused to Treasury.

Mr Khumalo agreed that was a clear disjunction in the way things were done, both in sectors and in the different spheres of government. Co-ordination was very weak. Programmes aimed at municipal capacity building did not originate from the national or provincial government, but rather from single departments, and they were not co-ordinated in any way. In many cases, this led to confusion. The FFC had raised this issue in the past, and should probably take action again, but it had no authority to ask the government to improve co-ordination.

He responded to members’ concerns over shortcomings in the Provincial Equitable Share (PES) by saying that between 96% and 97% of allocations were driven by population numbers, which were based on 2001 census figures. As this data was outdated, it was recommended that the effect of population on the formula be diluted by taking into consideration utilisation rates, for instance, at hospitals, or school enrolment figures. It appeared that there would be intervals of ten years between each census in future, and reliance on interim surveys had led to criticism in the past. These issues were currently being discussed, but the FFC had not yet made a final decision on its recommendations.

Dr D George (DA) said the FFC had put its NHI research project on hold, pending a declaration of the government’s position on the issue. He asked if the Commission now had the government’s position, and if so, if it was resuming its research.

Mr Khumalo replied the FFC did not have the government’s position, only the undertanding that the matter had been discussed at certain levels. The Commission’s direction came through being a part of the budget process. He said the FFC found itself “sitting on the outside” of all the government institutions involved in setting priorities. Sometimes they were able to pick up these issues quickly, but on other occasions, projects were picked up only when they were on the table, and people were already making decisions on the way things should be done. At some stage, the Commission should have been consulted, but sometimes issues were picked up only in Parliament, when they had already been gazetted. He conceded that the FFC was not always close to Government thinking on priority issues.

Ms Dlamini-Dubazana (ANC) said capacity building was aimed at overcoming skills shortages. She asked if the FFC was aware of what the specific skills shortages were, and who were the custodians of the country’s “skills inventory.”

Mr Khumalo replied he did not know who was responsible for a skills inventory, although quite a few departments had something to do with skills development in government. The FFC’s assessment of capacity-building programmes for local government presented a grim picture regarding their effectiveness. Improvements were not evident, particularly in rural areas. Many initiatives were still in place, but a co-ordinated effort was needed.

Mr E Mthethwa (ANC) asked why audit fees were higher than commissioned research – part of the Commission’s core function.

Mr Khumalo agreed that audit fees were high, but said they were standard rates set by the Auditor-General, over which the FFC had no control.

Ms Ajam responded to members’ questions on the need to outsource researchers, rather than using in-house staff. She said some issues, such as the effects of climate change, required specialist knowledge.

Mr Khumalo said the Commission was in the process of taking a new look at the provisions of the FFC Act, in terms of what the Commission should actually be doing. The process had been triggered by discussions with the Minister of Finance, who had certain views on what the Act itself meant, and the relevance of its provisions.

The meeting closed.


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