Financial and Fiscal Commission Submission 2013/14: Innovation in Intergovernmental Finance

Meeting report

Financial and Fiscal Commission 2013/14 submission on the Division of Revenue
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, tabled the annual submission of the Financial and Fiscal Commission (FFC) for 2013/14, which was entitled “Moving people out of Poverty: Supporting Innovation in Intergovernmental Financing”. He explained that this submission was divided into three interrelated parts, which addressed aspects of growth, education, climate change and developmental challenges within local government.

The first part, entitled “Supporting Inclusive Growth: Jobs, Knowledge and Regional Development” evaluated the perspectives and prospects for job creation and the Intergovernmental Fiscal Reviews (IGFR) system, the financing of E-education in ordinary schools in South Africa, and the budget review of public universities.The second part, “Climate Change and Environmental Sustainability: Opportunities and Risks for Growth and Innovation”, outlined the impact of climate change on the rural areas, alternative financing mechanisms for disaster management and financing of waste management in South Africa. The third section, “Institutional Development for Inclusive Growth and Innovation” outlined the impact of aggregate revenue and expenditure assignments on economic growth, alternative service delivery arrangements in the case of municipal agencies, capacity challenges at local government level and an assessment of gender-responsive budgeting in the local government sphere in South Africa.

Part One: Supporting Inclusive Growth: Jobs, Knowledge and Regional Development
Dr Ramos Mabugu, Head Researcher, Financial and Fiscal Commission, noted that in terms of the perspectives and prospects for job creation and the IGFR system, the 2010 data revealed that while economic recovery was taking place, after the 2009 global recession, it was not yet strong enough to restore jobs. Therefore, the country was faced with sluggish economic growth combined with unemployment. The effect of this was that in a few years South Africa could have what he called the “ninjna generation”  - young unemployed people with no income, no jobs, and no assets.

The major findings of the research revealed that the solution lay in a combination of higher government spending, higher spending on infrastructure and an increase in productivity growth. It was noted that higher taxes and higher debt could have serious detrimental effects, with tax financing leading to a decrease in employment whilst also crowding out of private investment, which could compromise future growth. He stated that fiscal policy alone was not sufficient to address the problem, and the ideal solution required complementary policies that could distinguish short term and long term interventions.

The recommendations made included re-directing Government spending towards activities that directly or indirectly created jobs such as health care, durable goods manufacturing, agriculture, community services and hospitality and food service. Moreover, it was noted that Government should promote lower-paying positions as this showed the highest potential for the most job gains. Government, through the Departments of Labour and Performance Monitoring and Evaluation, had to support those companies yielding the highest employment levels, directly and indirectly. Government also had to develop and implement credible job plans for each sphere, in collaboration with a broad set of actors such as unions, economic development agencies, secondary schools, colleges, universities, vocational training centres and business support providers.

Ms Tania Ajam, Commissioner, Financial and Fiscal Commission, stated that the financing of E-education in ordinary schools within South Africa was limited at national and provincial government level, except in Gauteng and Western Cape, despite the adoption of White Paper on e-Education in 2004. The reason was that financing of e-learning was left to the discretion of the provinces. The policy overlooked the fact that schools differed widely across Provinces, ranging from those that had relatively good infrastructure to those that used mud huts as classrooms. Given the great diversity of learning environments, an intergovernmental financing mechanism must address specific components of e-learning across all provinces. FFC recommended that firstly it was necessary to understand why the e-education challenge was not being met, and said that some of the reasons included the need for concerted cultural and technological adaptation, the need to recognise that education was a concurrent function between national and provincial government, and the need to have an explicit budget allocation for e-education. Supporting strategies and funding must also be established. FFC also noted that the national and provincial education sector required firm and expert guidance on the designing of e-education.

Dr Mabugu highlighted that the budget of public universities in South Africa required a transition from a low added-value economy to a more knowledge-intensive economy, which combined low, medium and high-knowledge intensive productive activities, in order to increase the proportion of medium to high income jobs. Such a transition required a strong, adequately-funded, post-school education system comprising of colleges, vocational institutions and universities. A summary of the generic budget and funding framework for higher education was then outlined. The performance analysis showed that the higher education system was not meeting its national development goals. The main concerns stemmed largely from unsatisfactory output rates, as many universities continued to have high student failure and dropout rates. In addition, the graduate and research output rates in all but a few universities were well below expected national targets. The current funding mechanisms were too “blunt” to steer the higher education system in effective ways. These mechanisms were being examined and reviewed by a Ministerial Committee set up by the Department of Higher Education and Training. The recommendations made by FFC included the creation of a new funding framework, which could be based on different funding principles and on a policy of institutional differentiation. The review of the funding framework had to be supported by research on formulating a future funding model that divided revenue into funding higher education, further education and research, in the most optimal way. In order to better understand and analyse the performance and funding of the Further Education Training Colleges (FET) sector, the Higher Education Information Management System (HEIMS) should be expanded to incorporate FET sector data, or a parallel system should be introduced to collect relevant data for analysis of the FET sector.

Part Two: Climate Change and Environmental Sustainability: Opportunities and Risks for Growth and Innovation
Ms Nomonde Madubula, Senior Researcher, Financial and Fiscal Commission, stated that the objective of the submission was to evaluate the impact of climate change on agriculture productivity and establish vulnerability of municipalities. The key findings suggest that in both the subsistence and commercial farming sectors, those farmers who would be worst affected by climate change could be crop farmers. FFC recommended that a new framework be introduced in South Africa, based on the different funding principles and on a policy of institutional differentiation. The Department of Environmental Affairs (DEA) and National Disaster Management Centre (NDMC) should develop a Municipal Vulnerability Index and risk modelling tools to assist municipalities to assess their vulnerability to climate change and non-climate change disasters, and determine associated contingent liabilities in order to account for exposure, sensitivity and adaptive capacity. In addition, the Department of Cooperative Governance (DCoG) had to adjust the objectives, terms and conditions of the grant framework and administrative procedures for the Municipal Infrastructure Grant (MIG). It was also imperative to use grant funds for climate adaptation and mitigation investment.

Alternative financing mechanisms for disaster management were needed in South Africa because the severity and frequency of natural disasters was increasing. The current challenges included the fact that the legislative, policy, institutional and funding frameworks were not adhered to by all spheres of Government. In addition, there was a lengthy bureaucratic process to be followed in disbursing funds. The funding made available for disaster management was not adequate to address the costs incurred by provinces or municipalities.

FFC recommended that the Minister for Cooperative Governance and Traditional Affairs should streamline guidelines and gazette uniform standards for governing and guiding the classification, declaration, assessment and response to disaster events in terms of the Disaster Management Act (DMA) and National Disaster Management Fund (NDMF). In addition, DCoG, using the DMA, should request the Integrated Development Plans (IDPs) of Municipalities, starting with the most vulnerable, to incorporate disaster risk reduction evaluations, strategies and measures such as including land use planning and management measures and building standards. Furthermore, Government should develop a policy framework for municipal disaster risk financing, which differentiated between municipalities, leveraged private resources to fund long-term disaster risk-management, and incentivised the use of innovative market based financing. Moreover, National Treasury, in managing fiscal risks, should require environmental management and vulnerability objectives to be explicitly incorporated into the designof existing key municipal grant programmes.

In respect of the financing of waste management in South Africa, there was a poor costing of capital, operation, maintenance and environmental implications of solid waste in municipalities, which led to unsustainable and poor cost recovery models, and poor revenue generation from Waste Management Systems (WMS). It must be recognised that solid waste recycling had the potential to directly and indirectly create and induce green jobs, so there was a need to strengthen the approach to waste management alternatives and find adequate financing.

FFC’s recommendations included that Government should adopt a phased approach to the implementation of Full Cost Accounting (FCA) by municipalities for solid waste management, by the end of the 2015/16 financial year. Government should also take greater advantage of the opportunities for job creation in the solid waste sector, by enhancing the structure of incentives for municipalities to create “green” jobs through using labour-intensive service delivery methods. DEA should delay the implementation of policy on the regionalisation of solid waste landfills until such time as the fiscal risks and benefits for municipalities in different contexts were better understood, and adequate decision-supporting measures for municipalities were in place. Government should also emphasise the expansion of access to solid waste services for poor communities, while strengthening the policy framework of the provision of Free Basic Refuse Removal Services.

Part Three: Institutional Development for Inclusive Growth and Innovation
Ms Marina Marinkov, Researcher: Macroeconomics and Public Finance Unit, Financial and Fiscal Commission, stated that the evaluation of the impact of aggregate revenue and expenditure assignments on economic growth was centered on the question; “Do South African provinces and municipalities play a useful role in promoting economic growth?” The method used was a modified endogenous growth model which used data on provinces and municipalities.

The key findings suggested that national strategies such as the New Growth Path (NGP) needed to permeate into provincial and local strategies.

FFC recommended that municipalities, and particularly non-metropolitan municipalities, should be encouraged to play a more direct role in economic growth. This could be done by assigning greater revenue and tax responsibilities to these municipalities. All elements of the fiscal framework had to be re-assessed to support the growth enhancing roles of municipalities. The research also revealed that municipalities needed to improve their revenue collection efforts, as this could contribute positively towards economic growth.

Alternative service delivery (ASD) arrangements in the case of municipal agencies provided a creative way for municipalities to deliver services, particularly against the backdrop of limited financial and human capital resources. FFC’s recommendations included that Government should review existing legislation, specifically sections 77 and 78 of the Municipal Systems Act and section 33 of the Municipal Financial Management Act (MFMA), which placed onerous expectations on Municipalities around the medium term use of an ASD arrangement.

The key findings of the capacity challenges at local government level revealed that, despite numerous attempts to attract skills into the public sector, municipalities continued to face major constraints around the quality of public officials available to deliver effectively. Consequently, the term “capacity constraints” were often used to mask the real causes of municipal non-performance. Furthermore, capacity building initiatives had to date been applied on a“one size fits all” basis.

FFC recommended that capacity building efforts had to be comprehensive and sustainable, instead of trying quick fix and short-term solutions. Capacity building interventions within a particular municipality  had to coordinate individual, organisational and institutional level dimensions of capacity building holistically over the medium term.

FFC’s key findings with regard to assessing gender responsive budgeting in the local government sphere revealed that there was a weak translation of gender equality commitments into fiscal commitments. This resulted in limited gender-responsive budgeting as the focus was on equity and not on mainstreaming of gender equality. FFC’s recommendations in this regard included that the national and provincial government should run a pilot project on gender budgeting in a few municipalities, to ensure that gender planning was institutionalised in municipal IDPs by sector. Government also needed to provide guidelines for collecting sex disaggregated data. In addition, local government had to institutionalise gender responsive budgeting processes linked to IDPs, build capacity for gender mainstreaming and gender responsive budgeting at the local level, and ensure gender-responsive appropriations and budget allocations.

Discussion
Mr C De Beer (ANC, Northern Cape) remarked that the revenue income from taxes could be negatively affected by the ongoing financial global crisis. Therefore, it was necessary to monitor how this could affect the allocation of resources to various government initiatives.

Mr Khumalo concurred that the allocation of resources could be greatly affected by the tight fiscal framework and cuts could have to be made. FFC would continue to research the financial and fiscal implications that the crisis could have on government policies.

Mr De Beer enquired the reasons for the termination of funding of the one-home-one-garden programme and school nutrition programs in the Northern Cape.

Mr Khumalo replied that FFC had made a direct contribution in the school nutrition programme by building a strong case to have the programme rolled out across age cohorts in the Northern Cape. Nonetheless, it could follow up on the matters raised.

Mr De Beer thought that FFC should conduct research on industries such as the platinum mines, which had the potential for absorbing large number of unemployed youth.

Dr Mabugu concurred that it was essential to conduct research evaluating the job opportunities that existed, in order to determine whether the young people could be the most likely to benefit. This process was essential when mapping out a strategy for implementation.

Mr B Mashile (ANC, Mpumalanga) asked about the role of FCC in the implementation and assessment of policies.

Mr Khumalo replied that FFC’s mandate was to ensure that it assessed the financial and fiscal implications of policies proposed by the Government and to make recommendations.

Mr Mashile inquired about the cluster of funding under which Universities of Technology were classified.

Dr Mabugu replied that the Universities of Technology were classified under technikons. The allocation of public universities into funding clusters was based on the universities’ performance, rather than the type of structure.

Mr Mashile suggested that the refuse removal business should be considered as a serious option that could absorb a large number of unemployed youth, as it required little skill and was labour-intensive.

Mr Khumalo replied that while that was FFC’s intention from the start, it was apparent that most rural municipalities did not regard refuse collection as a priority. Public-Private Partnerships (PPP) programmes in general were hampered by a lack of implementing frameworks.

Ms Ajam added that consultation with various stakeholders had revealed that numerous challenges were experienced in efforts to set up refuse collection businesses. These challenges included the fact that setting up the business required specialised equipment and building of buy-in centres within communities, where sorting of the recycled material could take place. The fact that the sorting process was labour-intensive offered the greatest opportunity for job creation. In addition, price fluctuations for sale of recycled material were a disincentive. Furthermore, FFC had no database on companies that were participating within the industry, and this was hindering coordination and successful implementation of such incentives.

Mr Mashile commented that it was ironic that municipalities were being awarded additional responsibilities of revenue income collection, when in reality some of them were not competent enough even to handle their own current grant allocations. The absence of legislation holding state owned entities accountable for their mismanagement worsened the situation. In most cases municipalities used capacity issues to mask non-performance.

Ms Ajam replied that the implementation of a central portal focusing on financial and performance related information of Municipal agencies could go a long way in providing an oversight over municipalities by government. In addition the portal could enable government to evaluate parent municipalities with capacity and assist those with less capacity. In some instances capacity issues in municipalities were exacerbated not by a lack of capacity building incentives, but rather by a lack of coordination in the training programmes. Coordination of these efforts was required.

Mr Mashile added that an analysis of the Auditor-General’s reports revealed that what was lacking in most municipalities was not so much skills, but compliant accounting systems. Therefore, he suggested that it was necessary to install built in mechanisms which could act as disincentives and incentives against non-compliance.

Mr Mashile enquired why the pilot studies on gender budgeting had not been conducted in all the metros. This could avoid creating the problem of excluding other metros during the selection process.

Ms Ajam replied that the intention was to select the sectors with the greatest gender budgeting impact.

Consideration and adoption of draft Report on the FFC Submission on 2013/14 Division of Revenue
Mr De Beer moved for the adoption of the report on the FFC Submission on 2013/2014 to be presented in the House and Mr Mashile seconded the move.

Consideration and adoption of draft minutes of 19 June 2012
Members adopted the minutes of the meeting on 19 June 2012, without amendments.

The meeting was adjourned.