Financial and Fiscal Commission Recommendations for 2012/13 Division of Revenue

Standing Committee on Appropriations

21 June 2011
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) briefed the Committee on its recommendations for the 2012/13 Division of Revenue. South Africa had been moving towards fiscal consolidation and medium-term forecasts indicated a reduction in the deficit. Government was proposing the implementation of fiscal guidelines aimed at strengthening fiscal frameworks, and the FFC believed that over the medium term Government should continue with a gradual programme of fiscal consolidation, and supported proposals to implement fiscal rules. However, it felt that there was a need to do substantially more to address unemployment and the relatively low economic growth, inequality and poverty, and the Millennium Development Goals (MDGs). Government faced difficult trade-offs in addressing macroeconomic and fiscal issues as well as the roles of its different spheres. Focused infrastructure spending would result in improved Gross Domestic Product growth and reduce the debt-to-GDP ratio. The FFC noted that the impact of AIDS would severely affect the achievement of the MDGs, particularly in reducing women and child mortality. It recommended that the equitable share and conditional grants expenditure be reprioritised, to focus more specifically on goals around promotion of universal education and HIV indicators, which would have a greater impact on achievement of the other goals. In addition, the time-frame for attaining of all outstanding MDGs should be extended.

The FFC further recommended that Government should continue strengthening the equity focus of the current system of intergovernmental transfers, particularly in the health and education sectors. It was noted that between 2004 and 2009, real average municipal consumer debt had decreased, but that municipalities were spending poorly on repairs and maintenance and needed to improve their technical efficiency. National and Provincial Treasuries needed support in improving the credibility of municipal budgets, and proper enforcement of provisions of the Municipal Systems Act would improve planning and funding of repairs and maintenance. In addition, Government should publish guidelines on management of municipal consumer debt, as well as supporting peer learning and support, including mentoring by more successful municipalities. The FFC noted inefficient use of land in cities, and noted that although densification was recommended, there were currently no incentives, and appropriate policies and financing to support it must be developed. Similarly, government should ensure that every municipality developed its own responses to mitigate and adapt against climate change, possibly including performance based conditional grants to reward and incentivise environmental efficiency. In regard to rural development, there was a need to clarify governance and institutional arrangements across all three spheres, to map rural development activities, and to review equitable share and conditional grant allocations for rural and agricultural development.

Members asked whether the Commission had looked into other possibilities for financing municipalities, outside of rates, taxes and payment for basic services, and whether capital contributions could be made to address densification of cities. They also questioned whether the FFC had investigated demarcation of municipalities, and whether it was not preferable to drive the proposed climate change incentives nationally. Members further asked whether the FFC supported performance-based grants, how it viewed the handling of scholar transport, and how the effectiveness of work done should be measured.

Meeting report

Financial and Fiscal Commission Recommendations for 2012/13 Division of Revenue
Mr Bongani Khumalo, Deputy Chairperson, Financial and Fiscal Commission, noted that the international economies were dealing with very complex issues around the macroeconomic and fiscal outlook. They had to adjust their fiscal policies within an uncertain environment. Particularly prominent issues related to budget process rules, within the context of rising fiscal deficits. South Africa had been moving towards fiscal consolidation for a while. Despite the latest budget, which had placed high priority on job-creation, the medium-term forecasts still indicated a reduction in the deficit. Government was also proposing the implementation of fiscal guidelines, aimed at strengthening fiscal frameworks, in line with the objectives of the new growth path. The Financial and Fiscal Commission (FFC or the Commission) felt that over the medium term, Government should continue with a gradual programme of fiscal consolidation which entailed moderate – although consistent – reduction of the budget deficit. The FFC also supported Government proposals to implement fiscal rules.

Mr Khumalo said that despite the positive economic picture, a lot more needed to be done around unemployment, the relatively low economic growth, inequality and poverty, and the millennium development goals (MDGs).  Government faced difficult trade-offs in addressing macroeconomic and fiscal issues, as well as the roles of its different spheres. In regard to the prospects for achieving accelerated economic growth, he noted that focused infrastructure spending could result in improved Gross Domestic Product (GDP) growth, and reduce the debt-to-GDP ratio, particularly in the medium term. As far as the MDGs were concerned, MDG 6 related to the lowering of maternal and child mortality, but the impact of AIDS on these two areas was significant. In addition, the costs of attaining all outstanding MDGs would be prohibitively high, in light of the huge amounts to be achieved over the next four years. The FFC recommended that in order to move closer to achieving the MDG goals, Government should reprioritise expenditure in respect of the 2012/13 Equitable Share and Conditional Grants, striving to attain the targets for universal education (MDG 2) and HIV/Aids indicators (MDG 6), as these two would have positive effects on other MDGs. The FFC also recommended that the time-frame for attaining all outstanding MDGs should also be extended, to make the task more feasible.

FFC further recommended that Government must continue to strengthen the equity focus of the current system of intergovernmental transfers, particularly in the health and education sectors. The existing transfer system was not the most effective instrument to support growth objectives. Government should also actively and specifically continue pursuing the implementation of significant capital investment in public infrastructure that had a positive impact on productivity and employment.

FFC commented on the development of a vibrant urban economy, saying that it had been found that, between 2004 and 2009, real average municipal consumer debt decreased for most categories of municipalities (except secondary cities and districts with major powers). However, despite making inroads to this challenge, there was still room for improvement in areas such as the management of debtors, accounting for indigents, affordability of basic services, billing and collection activities. Municipalities also spent poorly on repairs and maintenance and needed to improve their technical efficiency in utilising existing resources. The FFC therefore recommended that National and Provincial Treasuries must increase their efforts to improve the credibility of municipal budgets (through annual benchmarking exercises). Government should also enforce the provisions set out in section 74(2) of the Municipal Systems Act, to ensure that the basis of municipal tariffs accurately reflected the cost of providing the specific service, and also conformed to National Treasury expenditure guidelines for repairing and maintaining municipal infrastructure. This would go far towards improving the planning and funding of repairs and maintenance. National and Provincial governments should also require and assist municipalities to identify the primary causes of poor performance in billing and revenue collection functions, and use this information to design appropriate remedial strategies. As a further interim measure, Government should also establish and publish guidelines for municipalities on the management of municipal consumer debt, setting out interest charges, debt impairment and the writing off of bad debts. Peer learning and support programmes should be developed and supported in order to assist poorly performing municipalities to leverage the experience and best practices of well-performing municipalities, particularly in relation to spending performance, efficiency in using resources, proper debt management and the achievement of the desired development outcomes.

Mr Khumalo pointed out that a vibrant urban economy was essential for sustainable development, economic growth and optimal land use, and thus had the potential to unlock growth potential in the whole economy. However, in most South African cities, land was used inefficiently, as shown by low density per hectare. As this had a direct impact on the sustainability of resources, this challenge needed to be addressed. Although there were various pieces of legislation which acknowledged the importance of densification, there were no incentives. FFC therefore recommended that Government should actively pursue the development of a more spatially-compact form for urban cities, through the development and adoption of appropriate policies and financing instruments. Government should also review the Commission’s analytical work on fiscal and economic costs of the current urban form of cities. Government should also conduct a broad-based review of the efficacy of current housing finance arrangements in meeting housing needs, within the context of creating sustainable and more compact human settlements.

The challenges presented by climate change could undermine the need for urban economies to spur local economic development. The cost of climate change to local economies was also not well understood. It was a real threat to water and energy security in the local government sector and induced increases in water and electricity infrastructure expenditure. FFC recommendations included the need for Government to ensure that municipalities developed their own climate change mitigation and adaptation strategies, and the need to provide them, over the next three years, with support for this. Government should also consider providing municipalities with a performance-based conditional grant which rewarded or incentivised actions that were environmentally efficient and responsive to adaptation and mitigation challenges.

The major concerns for policy makers around expenditure were fiscal leakages and waste, cost overruns as a result of Occupation Specific Dispensation (OSD) and poor service delivery, which gave rise to inefficiencies.  Although public expenditure for basic education and health had increased since 1994, the rates of investment in these sectors did not yield adequate returns. Negative educational and health outcomes were also skewed against the poor. The FFC therefore recommended that Government should finalise the implementation of OSD, as well as formalising the performance evaluation system. Increases in education spending should also be directed towards investments that would have the biggest impact on quality. The coordination, financing and provisioning of scholar transport should also be improved. Through input and output norms and standards, Government should take reasonable measures to give effect to inclusive education of ‘intellectually disabled’ children. It should also extend its ongoing efforts to reform health fiscal frameworks by taking into account the burden of disease giving rise to budget pressures.

Mr Khumalo outlined the FFC’s recommendations for rural development, noting that governance and institutional arrangements for rural development across the three spheres of Government needed to be clarified urgently, and a functional mapping of all rural development activities should be undertaken The fiscal framework (both in terms of equitable share and conditional grant allocations) for rural and agricultural development needed to be reviewed.

In relation to unfunded mandates, FFC recommended that Government should take steps to ensure that all mandates had a legal basis and that the functions performed by each of its spheres had a secure legal footing. It should also undertake a review of compliance with legal procedures for the assignment and delegation of functions as set out in the Inter Governmental Framework Act, the FFC Act, the Division of Revenue Act (DORA) and Local Government: Municipal Systems Act (MSA).

Discussion
Mr M Swart (DA) asked whether the FFC had looked into other possibilities for financing municipalities, outside of rates, taxes and payment for basic services. He also asked whether FFC had any comment on the continued existence of district municipalities, considering that there were currently wall-to-wall municipalities.

Mr Khumalo answered that the Constitution assigned revenue sources for provincial Governments and municipalities. It was the specific responsibility of legislation to identify the revenue sources. The Commission had not as yet taken a view on the matter of district municipalities.

Mr Swart asked whether Government might be able to offer support by way of capital contributions, to address the issues around the densification of cities, especially given the high costs of inner-city land.

Mr Khumalo answered that as the positive impacts of densification were long-term, Government would benefit by giving some financial assistance to this goal.

Mr Swart asked if there should be another recommendation for more attention to be paid to skills development through technical schools.

Mr Khumalo said that this was an important issue, and the recommendation could be considered.

Mr J Gelderblom (ANC) asked whether the Commission had looked into the demarcation of municipalities, and if it could elaborate further on the mapping out of all rural development activities.

Mr Khumalo answered that although demarcation looked at fiscal capacity, economic states changed. It was a reality that certain municipalities were more dependent on grants. 

Ms Tania Ajam, Commissioner, Financial and Fiscal Commission, added that there were many institutions involved here, and there was a lack of clarity as to what role each was playing.

Ms R Mashigo (ANC) asked whether the recommendation for performance-based conditional grants around climate change should not be driven nationally, as opposed to locally. 

Mr Khumalo answered that the FFC had raised the fact that conditional grants were poorly designed and managed. As a result, national Departments responsible for these grants often did not take responsibility for the implementation of these grants. This proposal was also put forward to ensure that each municipality had its own plan in place to mitigate the effects of climate change. There would, however, still need to be an integrated and coordinated national strategy.

Ms Ajam added that this was an area that required the participation of all three spheres of Government. Although there were certain matters (such as pollution and mining) that had to be regulated at national level, it was also possible for municipalities, during the delivery of their core business, to make decisions or take actions that would have positive impacts on climate change. FFC supported the principle of having performance-related grants in general, though these should be evaluated effectively.

Mr L Ramatlakane (COPE) asked whether the FFC’s recommendations were based on accurate information.

Mr Khumalo answered that, as Parliament was its primary stakeholder, FFC must provide it with information that was accurate and sound. 

The Chairperson asked what the FFC was proposing in terms of conditional grants, performance-based incentives for municipalities, teacher training and the consolidation of agriculture and rural development grants. He also asked if FFC thought the handling of scholar transport was good or not.

Mr Khumalo answered that there were issues that related to national priorities, for which conditional grants were set up. Conditional grants were also set up for “spill-over” issues, which cut across different jurisdictions. For these two areas, the FFC was in favour of having conditional grants. However, it did not support conditional grants being created as a result of Government’s failure to deliver. There were serious inequities in the way the scholar transport programme was currently implemented.

Mr Ramatlakane asked whether there was any yardstick by which the effectiveness of the work done in relation to climate change by municipalities was measured.

Mr Khumalo answered that national Government was responsible for the setting of such norms and standards. Municipalities were obliged to carry out their duties in line with broader national objectives.

Mr Krish Kumar, Commissioner, Financial and Fiscal Commission, added that although there were no such measures at present, the upcoming Conference of Parties (COP 17) would assist in establishing measurement criteria.

The meeting was adjourned.



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