Financial and Fiscal Commission (FFC) on its Annual Strategic Plan 2011 (continuation)

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Finance Standing Committee

24 May 2011
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Financial and Fiscal Commission resumed its briefing on its Strategic Plan 2011/2012 in continuation of the meeting of 20 April 2011 at which the Chairperson had requested that the Commission return with members of the board in addition to members of the management team. The Parliamentary Office on Institutions Supporting Democracy was present. The Commission explained its strategic goals for 2011/12:

1.  Providing advice and reporting to Parliament, provincial legislatures, organised local government and other organs of state. The Commission had decided that it needed to disseminate its work as far as possible.
2.  Facilitating choices that would improve the Intergovernmental Fiscal Relations system and its development outcomes. In this the Commission sought to enhance the developmental impact of public resources through the financial and fiscal system in South Africa.
3.  Influencing the Intergovernmental Fiscal Relations agenda to respond to challenges in the global and domestic socio-economic environment and engaging with Government, stakeholders and citizens as regards the progressive realisation of rights through public financing. The second and third goals defined the bases of the Commission’s research strategy. A key additional piece of legislation affecting the Commission was the Money Bills Amendment Procedure and Related Matters Act (No 9 of 2009) which required the Commission to make inputs well beyond that required by the Intergovernmental Fiscal Relations Act 1997.
4.  Engaging with Government, stakeholders and citizens as regards the progressive realisation of rights through public financing. The Commission emphasised its desire to have better engagement with key stakeholders. The Commission’s work was not very well known. One difficulty for the work of the Commission was that there were no particular terms of reference for any one year.
5.  Establish and practise management of talent, facilities and finances. This related to internal processes and was to ensure good governance. The Commission had experienced a problem of staff turnover, especially in the core research function of the Commission. The Commission also had issues with other resources such as finances, information and communication technology.
6.  Focus on leadership and the development of a positive organisational culture. This had a strong relationship to the Commission’s governance issues

The Commission had engaged with the Minister of Finance, the Deputy Minister of Finance, the Director-General at the Presidency, and most recently, the Office for the Institutions Supporting Democracy to try to address some of the discrepancies detected around the Financial and Fiscal Commission Act and subsequent legislation. Research was the core area of the Commission’s activities. It was important for the Commission to build capacity. Of very great importance was climate change. The Commission carried out in depth budget analysis at local and provincial level to identify gaps. Credible data underpinned the Commission’s work. Research was the Commission’s core business, so it needed to produce high quality policy research which it could package and disseminate. It was of the utmost importance to secure underlying data. It was necessary to be supported by an effective secretariat and attract talent. The Chief Financial Officer provided analytical information. Recently grant funding had grown by less than 10%. A New Delivery model had been adopted to reduce the non-research staff complement from 34 to 26 over the medium term. The focus would be on continuity and special skills were to be sought at a rate similar to current employment costs. An initial 47% budget increase was required to address the liquidity issue and maintain the new delivery model. The audit fees were a major challenge and accounted for around 5% of the Commission’s total budget. The Commission wanted to increase its research budget in the medium term expenditure framework period. As outlined at the 20 April 2011 meeting, the Commission would be reducing the size of its office accommodation to reduce costs.

Members asked what the consequences would be if the Commission stopped its work tomorrow. Was it value for money? They asked if its research could be done by universities, development banks or other institutions, and doubted the value of its recent survey. Members asked why the Commission's audit fees were so high, appreciated the magnitude of the Commission's challenges but did not detect an attempt to correct this unfortunate situation on audit fees. Members asked for clarity on the Commission's model of funding to all spheres of Government, observed that the efficacy of the current model was an issue, and that it was argued that the current model was not of sufficient assistance in ensuring that local government delivered services. There was an outcry in the local constituencies about the inadequacy of funds to tackle service delivery challenges. This led people to question spending patterns and how we had structured our governmental system. People were asking if it was really necessary to retain spheres like provincial government or district municipalities since these structures were absorbing much of our budget. If we did not pay attention we might be faced by far more serious protests. Was it a priority for the Commission to ensure adequate funding at a local government level?

Members asked what the Commission's new delivery model was that needed such a budget increase to cater for it. The mandate of the Commission was very clear. The Commission was an independent, impartial body that provided advice to Parliament on the Division of Revenue to all spheres of Government on fiscal and financial matters, but Members felt frustrated that they were not receiving this information. The research unit existed. Therefore they asked why the Commission was not doing what it was mandated to do. If the Commission were to be given the budget that it was requesting, what would its strategy be to avoid the same scenario in which it now found itself? The Chairperson wondered if the South African Local Government Association still valued the information that the Commission provided. It was important for the Commission to ask itself how it should make itself relevant in the face of the forthcoming Parliamentary Budget Office. Since the Standing Committee already had access to much information, he asserted that the Commission should go further and not just analyse but say what the impact to the fiscus and to the Division of Revenue was, and should ask itself how it should best distil and interpret the information that it had at its disposal. The Chairperson referred to the People’s Budget Forum, which began its arguments with the implications for the poor. Parliament would hasten to decide whether the Commission was relevant or not. However, the Standing Committee wanted to assist the Commission to reallocate some functions to institutions that were better capacitated than the Commission itself. The Chairperson objected that it was also very hard to distil from this strategic plan what distinguished strategic objectives from mere intentions. However, Members must welcome the Commission's efforts, while finding a way to assist. The Commission was not aggressive enough in informing Parliament and eliciting Parliament’s response. When one dealt with the fiscal framework, the Standing Committee sought the advice of economists from universities or other institutions. Their reports in most instances were crafted based on the inputs of authorities other than the Commission.


Meeting report

Introduction
The Chair welcomed Mr Bongani Khumalo, Acting Chairperson and Chief Executive Officer of the Financial and Fiscal Commission (the Commission, FFC), Mr Mavuso Vokwana, Chief Financial Officer, FFC, Ms Tania Ajam, Commissioner, FFC, Mr David Savage, Commissioner, FFC, Ms Neli Shezi, Commissioner, FFC, Adv Princess Nonkosi Cetywayo, Head: Office on Institutions Supporting Democracy / Office of the Deputy Speaker, and Adv Kayalethu Zweni, Office on Institutions Supporting Democracy / Office of the Deputy Speaker, and Members.

The Chairperson acknowledged the very central role of the Commission in fiscal relations, and making sure that the spheres of Government found a way to collaborate both horizontally and vertically.

Financial and Fiscal Commission (FFC) on its Annual Strategic Plan 2011: briefing (continuation)
Mr Bongani Khumalo, Acting Chairperson and Chief Executive Officer of the Financial and Fiscal Commission (the Commission, FFC) explained the Commission’s strategic goals for 2011/2012. The first key strategic goal was providing advice and/or reporting to Parliament, provincial legislatures, organised local government and other organs of state in compliance with the Commission’s legislative mandate. This basically drew directly from the Commission’s mandate and what it had to do on an annual basis. The main issue here was that the Commission had taken the view that it needed to disseminate its work as far as possible. In the past dissemination had been mainly to Parliament with very little to the provinces. That process was intended to encourage feedback so that the Commission would know what its stakeholders required. So there was a very distinct stakeholder engagement dimension that the Commission wanted to address as another strategic goal in future (slide 5).

The second strategic goal related to facilitating choices that would improve the Intergovernmental Fiscal Relations (IGFR) system and its development outcomes (slide 5). Here basically the Commission tried to link the work that it did to the Commission’s vision to enhance the developmental impact of public resources through the financial and fiscal system in South Africa.

This defined the bases of the Commission’s research, and was linked to the Commission’s third strategic goal - influencing the IGFR agenda to respond to challenges in the (global and domestic) socio-economic environment; and engaging with Government, stakeholders and citizens as regards the progressive realisation of rights through public financing (slide 5). This goal, together with the second, defined the bases of the Commission’s research strategy. It was about how the Commission defined its research agenda to respond to the changing environment both domestically and externally.

If one looked at the pieces of legislation that now informed the work of the Commission, one key addition was the Money Bills Amendment Procedure and Related Matters Act 2009 (Act No. 9 of 2009) which required the Commission to make inputs well beyond what the Intergovernmental Fiscal Relations Act 1997 (Act No. 97 of 1997) as amended required. Part of the work that the Commission now sought to do was review the broader macro economic framework which basically dictated what the fiscal frameworks would look like. So the Commission was now considering the broader macro economic aggregates and the broader revenues side of the budget.

The fourth strategic goal was engaging with Government, stakeholders and citizens as regards the progressive realisation of rights through public financing (slide 5).

Mr Khumalo emphasised the Commission’s desire to have better engagement with key stakeholders. The Commission’s work was not very well known. One difficulty for the work of the Commission was that there were no particular terms of reference for any one year. The Commission had to access what its stakeholders needed for that year, otherwise the Commission might put out work, however good, that the system really did not require. The Commission needed to focus on this.

The fifth strategic goal – establish and practise management of talent (i.e. the recruitment, development, and retention of the best talent), facilities and finances to deliver - related closely to internal processes and ensuring good governance, Mr Khumalo commented. In the past, the Commission had experienced a problem of staff turnover, especially in the core research function of the Commission. The Commission also had issues around other resources such as finances, information and communication technology (ICT), and supporting inputs that would assist the Commission in delivering its work: this related particularly to the Commission’s Secretariat.

The sixth strategic goal - focused on leadership and the development a positive organisational culture – had a strong relationship to the Commission’s governance issues (slide 5). The Commission had engaged with the Minister of Finance, the Deputy Minister of Finance, the Director-General at the Presidency, and most recently, the Office for the Institutions Supporting Democracy to try to address some of the discrepancies detected around the Financial and Fiscal Commission Act and subsequent legislation.

Mr Khumalo referred Members to the presentation document for the Commission’s Strategic objectives 2011/2012, which were detailed under the headings of internal business processes, stakeholders, learning and innovation, and financials, in a table (slide 6).

The objective listed first of all was to generate quality, innovative, pioneering research that informs key IGFR strategic debates and choices (slide 6).

The Stakeholder Engagement Strategic Objective 2011/2012 sought the promotion, informing and influencing of grassroots, intergovernmental, legislative and intellectual discourse and thought on Commission-relevant IGFR issues; the facilitation of engagement between stakeholders (government, legislatures, interest groups, academia and citizens) on key IGFR issues; the profiling of the Commission with a special focus on the Commission’s Mandate, Vision, Mission and Role, the Commission’s Short- and Long-Term Strategy, the Commission’s position on specific issues, and the Commission’s Challenges and Achievements (slide 7).

The Talent Management Strategic Objective 2011/2012 sought the achievement of the progressive and innovative management of human resources that attracted, developed and retained key talent, and leveraged external expertise; implementation of progressive talent management strategies, policies and procedures; review, innovation and continuing implementation of the Commission recruitment strategies, policies and procedures; review, innovation and ongoing implementation of the Commission’s remuneration strategies, policies and procedures; review, innovation and ongoing implementation of the Commission’s performance management and bonus systems; review, innovation and ongoing implementation of the Commission’s education and training policies and procedures; and partnership and collaboration with other institutions that were looking into the same issues as the Commission to exploit economies of scale (slide 8).

The information and communication technology (ICT), and facilities management strategic objective 2011/2012 sought the achievement of the coordinated, coherent, high-quality, innovative and cost-effective approach to ICT that met the needs of the Commission, the Commission Secretariat and stakeholders; the coordinated, cost-effective and innovative acquisition and management of Commission data, information and knowledge resources in support of delivery on the Commission’s mandate; and the coordinated, cost-effective and innovative management of Commission assets in support of delivery on the Commission’s mandate (slide 9).

Research was the core area of the Commission’s activities.

The Objectives and Functions of the Commission’s Research were to conduct and foster basic and applied IGFR research which positively influenced developmental impact informed by: the main Government priorities and the fiscal framework; South Africa as a developmental state; ensuring fiscal sustainability; providing advice to the Commission on IGFR research priorities, promotion and utilisation; and helping build research capacity in IGFR for the Commission’s stakeholders (slide 10).

Research Themes and Projects 2011/12 towards Equitable Growth Paths, Distribution of Public Resources and Policy Outcomes comprised review of the Division of Revenue Bill (DoRA); review of equitable sharing; large scale modelling for interregional policy analysis in South Africa; fiscal decentralisation and economic growth; the impact of no fee schools on equity, funding and learner performance; and estimating costs of municipal services (slide 11).

Research Themes and Projects towards Accountable Institutions and Policy Outcomes comprised the evaluation of public transport operating subsidies in South Africa; an evaluation of sustainability and fiscal burden in the current human settlements delivery system in South Africa; understanding the dynamics of capacity challenges at local government; the impact of climate change on the agriculture sector, water and food security in rural South Africa; alternative service delivery arrangements: the case of special purpose vehicles (SPVs); assessing gender responsive budgeting in the local government sphere in South Africa; the role of IGFR in promoting innovation; national Government budget analysis; provincial budget analysis; local government budget analysis; identifying gaps and progress made with Government outcomes: a spatial approach; and identifying data gaps in the IGFR System (slides 12-13).

Research Themes and Projects towards Stakeholder Requests (flexible/ad hoc) comprised the financing of relief in case of natural disasters; legislation proposals with a financial and fiscal impact; and other unforeseeable referrals (slide 14).

The enhanced developmental impact of public resources through the financial and fiscal system in South Africa was indicated by a chart (slide 15).

Ms Tania Ajam, Commissioner, FFC, and the Chair of the FFC’s Research Committee, commented that the research was the core area of the FFC’s business. It was constantly necessary to balance what were the longer term issues. She alluded to the work of Dr Ramos Mabugu, Head of the Research and Recommendations Programme, and his team of researchers. The Research Committee had to check that they [the objectives] were attaining their impact in terms of the fiscal framework and Government priorities. The Research Committee understood South Africa as a developmental state. It was important for the Commission to build capacity, while reviewing the Division of Revenue Act (DoRA), the Commission’s core mandate, models of provincial projects, the impact of no fee schools, and short term forecasting models for South Africa. Of very great importance was climate change. Equity was important and was linked to innovation. The Commission carried out in depth budget analysis at local and provincial level to identify gaps. Credible data underpinned the Commission’s work. Research was the Commission’s core business, so it needed high quality policy research which it could package and disseminate. It was of the utmost importance to secure underlying data. It was necessary to be supported by an effective secretariat. Ms Ajam emphasised the need to attract talent.

Mr Mavuso Vokwana, FFC CFO, provided analytical information. Since establishment, the FFC revenue grant had grown by an average of 20% with a healthy reserve ratio of 1:2. In 2003/04 the FFC experienced a 19.4% deficit over revenue and baseline was increased by 45% and maintained at an inflation linked rate. In 2006/07 the FFC experienced another 14% deficit due to business growth thus resulting in erosion of reserves. An all time low acid test ratio of 0.006 was reported. Business growth was evidenced by 34% increase in headcount and 13% increase in personnel costs, 40% in audit fees and a steady increase of stakeholder management costs. The acid test ratio had never recovered since, indicating technical insolvency at low level of 0.049 by end 2010/11. Recently grant funding grew by less than 10% while o
perational expenditure (OPEX) remained higher than growth rate resulting in budget pressures (slide 16).

The way forward was envisaged as follows: the New Delivery model had been adopted to reduce non-research staff complement from 34 to 26 over the medium term. The focus would be on continuity and special skills were to be sought at a rate similar to current employment costs. An Initial 47% budget increase was required to address the liquidity issue, maintain the new delivery model and stabilize at 5% increase over the medium term. (Slide 17)

The Commission’s budget was detailed in a table (slides 18-19), and a 10 year financial position analysis, from 2001/02 to 2009/10 (audited results) and 2010/11 (projection) with turnaround projections for 2011/12 to 2013/14 (slide 20).

Mr Vokwana commented that one of the challenges was the audit fees. These were around 5% of the Commission’s total budget. Other institutions paid far lower fees than that Commission paid. Other challenges were the stakeholder management costs, failure to recover fully from the Commission’s deficit, that the Commission’s balance sheet currently was not looking good, that the non-research staff complement was to be reduced from 34 to 26, and that the Commission needed a budget injection. The Commission wanted to increase its research budget in the medium term expenditure framework (MTEF) period. As outlined at the 20 April 2011 meeting, the Commission would be reducing the size of its office accommodation to reduce costs.

Discussion
Mr N Koornhof (COPE) acknowledged that the FFC was a constitutional institution, but asked what the consequences would be if the FFC stopped doing its work tomorrow. Was the money spent on the FFC worth it? Did the FFC really make an impact? Could not the FFC’s research be done by universities, development banks or other institutions, and was the FFC really making a difference? He said that the FFC had sent out a survey to ask whether people knew about the FFC. However, for Mr Koornhof, even as a Member of the Standing Committee, it was very difficult to complete the survey. ‘I could not answer many of the questions. Now if I cannot do it, now can the public do it?’ Did the FFC still think that it was valuable and making a good contribution?

Mr Khumalo’s first more direct response would be that Parliament would be basically the best place to ask the question. From his own viewpoint, there would consequences if the FFC stopped working tomorrow. However, from the viewpoint of ‘the system’, he thought that Parliament would still want to ask the questions on how the FFC could be used as an instrument that the Constitution had, by virtue of Chapter 13, put in place as a key pillar of the country. The FFC was a very key institution in that respect. Whether or not it was being utilised to the extent to which the Constitution intended it to be used was a question that the Commission might rather ask the Standing Committee. From his own viewpoint, he thought that the Commission had accomplished a good deal of valuable work. It had contributed to the evolution of ‘the system’ and it still had a role to play in mediating some of the problems with which we found ourselves confronted in terms of the inter-governmental fiscal relations dynamic. In that respect there was still a role for the Commission. However, the bigger question that Mr Koornhof was asking was really a question on which the Commission must ask Parliament for guidance. In terms of the survey that the FFC had conducted, it was quite disappointing to find that out of about 700 questionnaires that were sent out electronically, there was a return of only 11, including the single return out of the approximately 300 that were sent to Members of Parliament. Mr Khumalo repeated that Mr Koornhof’s question might be better answered by Parliament itself.

Ms Ajam replied that it was very important to ask what value the Commission was adding. The Commission itself had reflected on it in its strategic planning session. She wanted to highlight something that Parliamentarians already knew: that fiscal policy was inherently contentious. The view from the municipal sphere might legitimately differ from the provincial sphere. Right now the National Treasury was the only one source of solid technical information. Given the Parliament had to make quite crucial oversight and policy decisions, it was incredibly useful for Parliament actually to have at least two views – technical views – to consider. For Ms Ajam, the Money Bills Amendment Procedure and Related Matters Act 2009 (Act No. 9 of 2009) increased the importance and value to Parliament of those two technical views, which looked at considerations of implementation, not just of policy. Ms Ajam pointed out that when she first began research in inter-governmental fiscal relations, she had no economist to talk to. Only the constitutional lawyers wanted to speak to her. ‘Now we have a community of practice.’ The more diversified one could make this community of practice, the better the quality of skills that could be achieved, not only in the FFC but in the Government sector in general. If one looked at National Treasury’s documentation, one could see that National Treasury did much inter-governmental fiscal work, but published only a few documents. National Treasury published only the Budget Review and every second year the provincial and municipal reviews. If one were in academia, or if one were an external analyst, one would not find much of a body of literature from which to see what underlying issues were. The FFC’s website demonstrated a track record of publications dating back to the FFC’s inception. This institutional memory was very important. Elected representatives, because of democratic institutions, came and went. However, the FFC had a repository that captured what it had done, what decisions were made, and why they were made. Thus the FFC’s work was incredibly useful. While National Treasury had an important responsibility to examine budget cycles, sometimes the tyranny of the budget cycle was a constraint on looking at the long term evolution of the system. This was where the FFC could add value. Ms Ajam said that it was important to note that Members of Parliament saw the outcome of this process, but it was the 18 month engagement in the budget process in which the FFC disseminated widely with its stakeholders. At the end of the day it was that process that was practically more important than the actual documents which emerged. Therefore there were elements to which external academics could add value but buy-in and co-ordination in the spheres of Government required much change management. If one looked at the specialist capacity that the FFC had established over the years, it had not been an easy task. ‘Our recommendations are not just an á la carte menu of various research projects. They actually needed to be internally consistent. If the FFC was doing model projections on the macro economic situation, its recommendations and micro recommendations on the Division of Revenue had to be consistent too. She agreed that some of these tasks could be outsourced, but ensuring overall cohesion would be very difficult to achieve on an outsourced basis.

Mr Koornhof asked why the FFC’s audit fees were so high; what were the FFC’s procurement conditions?

Mr D van Rooyen (ANC) said that Mr Koornhof had anticipated his question on the FFC’s audit costs.

Mr Vokwana replied that the FFC did not appoint its auditors. It was audited by the Auditor-General (AG), who determined the rates. All that the FFC could do was to take up the issue with the National Treasury. Also, as the year progressed, there were many additional audit issues arising, like performance information and supply chain management on which the FFC used not to be audited. These resulted in extra costs. Moreover, the FFC was a small and human-resource driven institution. The Auditor-General audited according to standards that the AG set. Also the AG now required a quarterly review, and not only reviewed the year, but asked if the FFC was meeting its strategic goals. The FFC’s Acting Chairperson was trying to engage even the Accountant General, since the FFC was not consulted as to the audit fees. Members of the private sector with a comparable budget paid far lower fees than the FFC was charged.

Mr Van Rooyen appreciated the magnitude of the FFC’s challenges. However, he did not detect an attempt to correct this unfortunate situation on audit fees.

Mr Van Rooyen asked for clarity on the FFC’s model of funding to all spheres of Government. He observed that the efficacy of the current model was an issue, and that it was argued that the current model was not of sufficient assistance in ensuring that local government delivered services. Where was the model featured in the FFC’s targeted themes?

Mr Khumalo understood that Mr Van Rooyen was talking about the funding model for local government. This had been reported extensively in the press. Mr Khumalo wanted to link it in an indirect way to Mr Koornhof’s first question. This matter of the funding model for local government had been with the FFC for a very long time. It had worked on the current model in 2005, but a few things had been left outstanding ‘because somebody had to take a decision somewhere’. The FFC had since been working on that again. If one looked at the Division of Revenue Bill (DoRB) for the current year the FFC had made substantial inputs towards improving the rural focus to try and change the focus of the allocation system so that it did take into account the rural municipalities. What had been happening was that as the local government equitable share pool had been growing, more and more, in relative terms, had been going to the bigger cities. It was obviously as a result of the components that constitute the formula and the way in which they were configured. This was something that the FFC had been working to reverse to ensure that rural municipalities also benefited and in fact benefited relatively more as the pool for local government equitable share increased. This was technical work that the Commission was doing. The FFC was part and parcel of the team that constituted the National Treasury and organised local government’s review of the local government equitable share formula.

Mr Van Rooyen said that there was an outcry in the local constituencies about the inadequacy of funds to tackle service delivery challenges. This led people to question spending patterns and how we had structured our governmental system. People were posing questions and asking if it was really necessary to retain spheres like provincial government or if it was really necessary to have district municipalities since people thought that these structures were absorbing much of our budget. If we did not pay attention we might be faced by far more serious protests. Was it a priority for the Commission to ensure adequate funding at a local government level?

Ms Z Dlamini-Dubazana (ANC) had reviewed the goals that the FFC had set itself, as explained by Mr Khumalo, and the request for the budget increase which was needed to cater for the new delivery model. ‘Now what is this delivery model?’

Mr Khumalo replied that the delivery model referred to was basically a model that the Commission had adopted or was proposing to adopt. It was a model that mixed internal core business capacity with external technical expertise for specialised areas so that the FFC would not retain on its staff many personnel who were working on projects that had a time frame. The model was a means to rework the way in which the FFC conducted its business.

Ms Dlamini-Dubazana asked Mr Khumalo to explain what he meant. Was he referring to outsourcing?

Mr Khumalo explained that there were certain projects of a specialised nature, for example, climate change issues. It was highly unlikely that the FFC would possess in-house those skills or that capacity for that kind of work. So the FFC would have to outsource that kind of work by sub-contracting or buying skills or capacity from outside.

Ms Dlamini-Dubazana noted that the FFC had reduced the staff, but an improvement was not to be observed. What value did the staff reduction add?

Mr Khumalo replied that the reduction of the staff was ongoing. The FFC had stopped filling vacant positions unless it was absolutely necessary. Part of the reason for not being able to see an immediate improvement in the position was that the trade off between rising operational costs and the FFC’s revenue was to decide to stop spending on the FFC’s ICT infrastructure to the extent that it had become totally eroded. Equipment on average was now about five years old. That was not a healthy situation for a knowledge-intensive institution. However, the FFC was managing to cope with it.

Ms Dlamini-Dubazana said that Mr Koornhof had asked whether the Commission added value or not because, with reference to Section 220 of the Constitution, the mandate of the Commission was very clear. The Commission was an independent, impartial body that provided advice to Parliament on the Division of Revenue to all spheres of Government on fiscal and financial matters. However, Ms Dlamini-Dubazana vented her frustration that, in her view, Members of Parliament were not receiving this information. This was why Mr Van Rooyen kept asking about the funding model. The FFC was Parliament’s advisers. The research unit existed. Therefore it had to be asked why the FFC was not doing what it was mandated to do. That was the main question.

The Chairperson said that there was a pillar in the middle of Room M314 that was meant to protect delegates from the bullets coming from the side of the Members of the Standing Committee. He asked the Commission to brace itself for the next question.

Mr E Mthethwa (ANC) asked the Commission, if it were to be given the budget that it was requesting, what its strategy would be to avoid the same scenario in which it now found itself.

Mr Khumalo replied that the way in which the Commission operated on an annual basis was that it tabled a submission on the Division of Revenue for the following year and Medium Term Expenditure Framework. (MTEF). In fact, on Friday, 27 May 2011 the FFC would tabling its submission on the Division of Revenue for 2012 MTEF. In that submission there were a number of recommendations around the local government funding model that the FFC had tabled as far back as 2001. It was unfortunate that the FFC had to discuss it this way. Mr Khumalo, as Chairperson of the Commission, had been having some discussions with the Institutions Supporting Democracy. When there were statements around what the Commission had done and what it had not done, in most cases one found that the kind of issues that were being raised, sometimes even by Ministers, were issues embodied in a submission of the Commission. The way in which the Commission’s recommendations had been responded to had been analysed by the Commission. It had to be emphasised that the Commission could not enforce implementation. Sometimes implementation was not apparent until five years later. However, it was difficult if the Commission was not talking to Parliament, or if it was talking to Parliament but Parliament was not responding by providing feedback on what Parliament wanted the Commission to follow up or examine in greater depth. For example, with regard to the one submission that the Commission made on an annual basis, what the Commission always received was Government’s view; it had never received Parliament’s view. Mr Khumalo had raised this matter with the Office for Institutions Supporting Democracy. It was not the case that the Commission was not producing the work. Through its stakeholder engagement programme, the Commission was trying to find space in Parliament for a conversation beyond the regular briefings on the Commission’s recommendations. Public hearings were held, but sometimes the Commission did not get the feedback, from the people who had actually made an input in terms of the public hearings process, on how the Commission should deal with a particular matter.

Mr David Savage, Commissioner, FFC, reflected on the points made in the presentation and on the long lead time for the Commission to make recommendations because it tried to base them on solid empirical research that drew from both global and local experience. It was not just a matter of perspective which the Commission tried to produce on the spur of the moment. It was something that could be deeply defended and rigorously argued. Historically the Commission had focuses on provincial government in the Division of Revenue process. That was indeed an important focus area of the Commission from its inception to about 2003/04. However, from that point the Commission had recognised the need considerably to expand its research and recommendations on local government. There had been a growing set of recommendations around the funding model. Mr Khumalo had touched on some of the technical aspects of funding local government as regards the formula for the equitable share and on specific conditional grant programmes for local government. However the Commission had taken was that the problems of local government were not to be solved just by additional funding alone. In fact, the evidence did not bear out that it was just funding that was a problem in local government. There were indeed contextual difficulties. There were local governments that had revenue constraints and some which had fewer revenue constraints. However, if one looked at two local governments in very poor areas, they could demonstrate very different levels of performance, both as to revenue and to output. So it was not just about how much local governments received from the national fiscus. The Commission had started to examine what the determinants of long term fiscal capacity performance in municipalities were, and had made recommendations around those. It had also made recommendations around what appeared to be successful strategies to strengthen municipal capacity, and so had tried to look more closely than simply the equitable share. The Commission’s work in this respect was not yet finished, as these were very complicated questions that required a depth of information that was not readily available in South Africa. Some Members might know that some of the base line data for the calculation of the equitable share allocations was taken from a 1995 survey of 20 municipalities. That base data remained unchanged. The Commission had, on a number of occasions, recommended that Government update that information by means of a much more comprehensive survey, and the Commission was currently undertaking its own work in that regard. That was just one small but critical part of allowing the funding model for local government to evolve and having the right data in place. It was not just about the available money, but about the capacity-building strategies for local government. Members would see over the next few years a growing body of research and recommendations from the Commission specifically on local government. Some of this research was really at the cutting edge of thinking on the issue.

The Chairperson believed that Members had almost exhausted their questions on the strategic plan. However, he observed that a major question was related to the history of fiscal evolution in South Africa. Some Members had had experience of financial matters in the days before local government was strengthened to where it was now, and of the battle between national government and provinces. When the present provinces were formed, they were an amalgamation of many institutions, and there was a problem of inherited debt. The provinces had not the capacity to deal with these problems. Therefore it was asked what the basic formula to allocate resources should be. The FFC played a very critical role. Provinces utilised that information effectively to argue their respective cases with national Government, and, in particular, National Treasury. It was out of that dialogue that the present allocations came to be determined. Funds must follow functions in terms of mandates. In terms of grants for infrastructure backlog, it was acknowledged that the national Government should deal with the provinces differently. The FFC was there to advise. One of the key questions for the FFC, with institutional maturity, was to say what the threats and opportunities for it were. He made a comparison: it was actually the rich who must lead the battle against poverty, because, if they failed to do so, the poor would become a threat to them. Perhaps the FFC should subject itself to some self-analysis. He noted that its mandate derived from the Constitution and enabling legislation that had come into being to assist Government as a whole, not just the FFC. When the South African Local Government Association (SALGA) had come into being, the FFC was very relevant and SALGA used to argue its case through the information and analysis that FFC provided. He wondered if SALGA still valued the information that FFC provided. It was important for FFC to ask itself how it should make itself relevant. The Chairperson’s personal assistant (PA) had repeatedly asked him to answer the FFC’s questionnaire, but the Chairperson had declined on the basis that the questionnaire was too cumbersome; he preferred to talk to Mr Khumalo directly. The Chairperson argued that the FFC’s first major strategic goal - providing advice and/or reporting to Parliament, provincial legislatures, organised local government and other organs of state in compliance with the Commission’s legislative mandate – embodied the makings of the Parliamentary Budget Office that was coming into being. This Office would do research on basically everything related to the fiscus. In terms of this development, it had to be asked where the FFC’s research work fitted. Parliament was going to depend more and more on its own Budget Office. The Chairperson observed too much cut and paste in regard to the FFC’s third strategic goal – influencing the IGFR agenda to respond to challenges in the (global and domestic) socio-economic environment. This Standing Committee had access to the Reserve Bank quarterly reports; it also had access to the National Treasury’s and Financial Services Board (FSB)’s reports. He implied that there was almost the same material in the FFC reports. Since the Standing Committee already had access to this information, he asserted that the FFC should go further and not just analyse but say what the impact to the fiscus and to the Division of Revenue was, and the challenges arising. This is what the Standing Committee would be looking for. Some Members read George Soros and other authorities. While there were differences, one also found convergence as one moved forward. The Chairperson referred to the People’s Budget Forum, which began its arguments with the implications for the poor. The FFC should ask itself how it should best distil and interpret the information that it had at its disposal. This would assist Members of Parliament decide what the challenges in terms of the current arrangements were. That self-analysis was very important for the FFC. In the Chairperson’s view, the FFC would not achieve the answer through its survey process on whether people knew about the FFC or not. Parliament would not rush into a decision on whether the FFC was relevant or not because this was an institution for entrenching democracy. However, the Standing Committee wanted to assist the FFC to redirect some of its work to be of more help to Members of Parliament. The FFC could reallocate some functions to institutions that were better capacitated than the FFC itself. The Chairperson objected that it was also very hard to distil from this strategic plan what distinguished strategic objectives from mere intentions. The FFC had not married its strategic plan to its annual report. However, Members must welcome the FFC’s efforts and work, while finding a way to assist. It was not enough for Members to imbibe the FFC’s presentations and merely offer praise. The FFC had challenges of capacity. Its work was more on the research side, as it was supposed to be, and therefore needed internal support, otherwise, as the Chairperson detected from Members, its work would be relegated to the source of information of last resort. There was still need for the FFC as an institution to continue to do its work and assist Members, but when it submitted its reports and recommendations to National Treasury it listened for National Treasury’s response. The Chairperson did not think that the FFC was aggressive enough in informing Parliament and eliciting Parliament’s response. When one dealt with the fiscal framework, the Standing Committee sought the advice of economists from universities or other institutions. Their reports in most instances were crafted based on the inputs of authorities other that the FFC. ‘I think that says something.’ The FFC and Parliament needed to look into it. In short, Members should accept that what they were dealing with was work in progress and the Standing Committee should continue to reflect on what the best way of taking this work forward was.

Mr Khumalo thanked the Chairperson for his feedback. It was pointless to brief someone and not get any feedback. Feedback was of assistance, at least, in giving some direction.

The Chairperson thanked the FFC and adjourned the meeting.

Apologies
Apologies were received from Dr Z Luyenge (ANC), Ms N Sibhidla (ANC), and Mr M Swart (DA)

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