Appropriation Bill [B1-2013]: briefing by Financial and Fiscal Commission

Standing Committee on Appropriations

15 May 2013
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Financial and Fiscal Commission briefed the Committee on the 2013/14 Appropriation Bill. The Commission referred to government efforts to address the root causes of poor performance. Challenges lay not in technical financial management, but in the political-administrative interface, HR management, organisational systems and capacity. Current views on fiscal policy centred on sustainability. There was concern that national departments did not have norms and standards for concurrent functions. Government policy required increased spending on infrastructure, but there were challenges around how money would be spent.  There had to be increased productivity for infrastructure investment to have real value. Government had to employ more people, rather than increase wages. Provinces had a responsibility to support local government. There had to be conditions attached to capacity grants, and cost efficiency had to be defined and measured. Underlying cost drivers had to be identified, to determine cost efficiencies. The Commission was concerned over underspending on capital assets at the provincial level. Water Affairs challenges were related to in-year budget monitoring. There had to be more spending on human settlements. Economic deficit was the biggest strategic risk. The relation between business and organised labour had to be less adversarial. There had to be improved small business development of entrepreneurship, and increased infrastructure development.

During the discussion, Members expressed concern provincial legislatures and the lack of central fiscal control. In addition, they asked about changes in the Municipal Infrastructure Support Agency, conditions for capacity grants, if there were too many municipalities, if there was enough money to train small business entrepreneurs and how norms and standards were to be legislated for. Matters relating to the South African Gross Domestic Product and strategies for turnaround were explored.

Meeting report

Briefing by the Financial and Fiscal Commission on the 2013/14 Appropriation Bill
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, referred to government efforts to address the root causes of poor performance. FFC believed that challenges lay not in technical financial management, but at the political-administrative interface, HR management, organisational systems and capacity. There was a tightening of regulations at local government level.

Dr Ramos Mabugu, Research Director, FFC, continued that current views on fiscal policy centred on sustainability. He displayed graphs that depicted the world’s gross domestic product (GDP) as opposed to the South African (SA) GDP; budget deficit as part of the GDP, and the real growth of expenditure components.

There was a concern that national departments did not have norms and standards for concurrent functions. That resulted in varying quality of service across provinces. Government policy required increased spending on infrastructure, but there were challenges around how money had to be spent. Without positive impact of infrastructure on total factor productivity, public investment had almost no impact on the SA economy. Expenditure on infrastructure alone had a negligible impact on employment growth. It would be better for government to employ more people than to blow up wages.

Provinces had a Constitutional and legislative responsibility to monitor and support local government. There had to be conditions attached to capacity grants to commit municipalities to performance improvements. Cost efficiency had to be defined and measured.

Ms Sasha Peters, Research Specialist, FFC, described a diagnostic tool to identify cost efficiencies. Underlying cost drivers had to be identified. The Commission was concerned over under expenditure on capital assets at the provincial level. It was suggested that the Department of Water Affairs experienced challenges with in-year budget monitoring processes. Most funds were spent in the last quarter on transfers, subsidies and capital assets. Spending on human settlements had to improve.

Mr Khumalo concluded that the economic deficit was the biggest strategic risk. Fiscal consolidation had to be implemented so that short run growth was least compromised, and potential for long term growth increased. The relationship between business and organised labour had to be less adversarial. There had to be greater focus on improving small business development of entrepreneurship, and increased infrastructural investment.

Discussion
Ms Mashego (ANC) referred to the enhancement of local government capacity. The role of the Municipal Infrastructure Support Agency (MISA) was uncertain, as MISA kept changing. She asked if systems were effective, and about conditions attached to capacity grants. There was a lack of service delivery.

Mr Khumalo replied that the Treasury Technical Assistance Unit (TAU) assisted with creating effective systems. MISA and the TAU were new players, who worked with the treasury to build capacity grants for local government. The Department of Cooperative Governance and Traditional Affairs worked with the Treasury for infrastructure, together with MISA. Effectiveness could not yet be assessed because it was the first year. But the FFC recommended a clear protocol process between all entities to implement infrastructure grants. Municipalities were still confused. The FFC had not yet had insight into MISA programmes. The spending of conditional grants was not proceeding well.

Ms Mashego referred to the Expanded Public Works Programme (EPWP). With reference to municipal development, she said that one could not take someone from the street and expect them to be a teacher. She asked about the impact of education.

Dr Mabugu replied that it depended on what part of the cycle the economy was in. During a big recession, it was not advisable to have too many conditions. For a better job strategy, the EPWP had to be scaled up. That could happen once the country was out of the recession. When people were dying of hunger due to unemployment, it was better to have little structure.

Mr J Gelderblom (ANC) asked if there were perhaps too many municipalities.

Mr Khumalo replied that he could not answer off the cuff. Municipalities had already been drastically reduced in number. There were different sets of criteria for municipalities. The aim was to create useful municipalities. The FFC had a Memorandum of Understanding (MOU) with the Municipal Demarcation Board. It was driven by the need to share capacity to assess viability of different kinds of municipalities. The Municipal Demarcation Board (MDB) had to deal with the question of whether demarcation made sense. Top officials in the FFC were working with the MDB.

Mr Gelderblom referred to the improvement of small business. There had to be enough training for entrepreneurs. He asked if there was enough money for that, and enough programmes and trainers. More mentors had to be brought in and the business community should be approached.

Dr Mabugu replied that the single biggest problem faced was bad management. When all other factors were eliminated, that was the most vital constraint.

The Chairperson referred to the graph that depicted the world GDP versus South African GDP. It was said that South Africa faced more pressure. He asked why that was so. He asked about the possibilities for turnaround.

Dr Mabugu replied that the developing countries were hit harder. There was the possibility that the Brazil/Russia/India/China/South Africa (BRICS) community could assist South Africa for turnaround. It depended on the flow of goods and services in the BRICS community, and the flow of factors of production like capital and labour. South Africa had a skills shortage. BRICS could supply a huge volume of skills from China and Brazil. Skills were the biggest South African flaw. When it came to goods and services, the situation was that South Africa sold resources. The challenge was that South Africa was mostly selling manufactured goods to sub-Saharan Africa. New markets had to be opened for manufactured products. There was a market for minerals outside BRICS. The question was if the country could access BRICS manufacturing markets. China for one could manufacture more cheaply than South Africa. A rethink was needed. Skills had to be developed, coupled with the importation of technology and the capture of commodity markets.
 
The Chairperson asked about implications of the European recession for South African growth. He asked why the South African economy did not show the same response as other developing countries.

Dr Mabugu replied that the arithmetic for the European recession looked bad. South Africa had to consider switching from the European Union to BRICS. The rest of Africa was already available. The risk was that a switch from the European Union to BRICS could cause a South African recession. There had to be continual diversification and interventions. It would not do to pack all eggs in one basket.

The Chairperson referred to compensation of employees. The situation looked uncertain. He asked if the FFC thought it was under control. People were saying that there could be long term problems. Public servants kept demanding increments to their pay.

Mr M Swart (DA) asked about the role of trade unions.

Mr Khumalo replied that the Chairperson and Mr Swart were asking the same question. The FFC had looked for key drivers in the provincial sphere. It was brought under control. Growth in the public sector had to be arrested. If not related to productivity, infrastructure was useless. Too many people were sitting behind desks doing nothing. Labour agreements in the private sector were beyond control of government.

Mr G Snell (ANC) asked what was meant by a fiscal control accountability framework. In terms of the government superstructure, 43% of the budget went to the provinces. There was a lack of central control over that. Provincial legislatures were not accountable to the national legislature. 43% was lost to achieve national objectives. Provinces had to support local government. The Constitution required that there be national support to provinces. That meant that National were responsible for making local government work. Down chain capacitating was not good. Work had to be done within the framework of cooperative government.

Mr Khumalo replied that the Commission had been asked to understand economic development at the provincial level. Economic development and tourism did not benefit fully from allocation across provinces. Functions were not prioritised. The question was what the role of provinces was to be when priorities changed. The FFC had tried to measure the provincial impact on development. The briefing assumed the need for the Constitutional responsibility of national and provincial government for local government. Local government was not spending effectively because of lack of capacity. Money belonged to the national government, but the question was who had to take responsibility for the lack of capacity to spend. National and provincial government had to support capacity building. Money could not be withheld because of a lack of capacity. There was an accountability chain. Provinces had to take their own decisions and account for them, but governance assumed that there was collective responsibility for and shared ownership of programmes. There had to be action in good faith. For fiscal consolidation, the rule was to adopt a fiscal framework drawn from the Public Finance Management Act (PFMA) and the Division of Revenue Act. Together they formed a strong framework. Chapter 13 of the PFMA granted too much responsibility to technocrats.

Mr Khumalo continued that the PFMA contained sanctions for violations, which had to be implemented. The Minister had asked for a comment on fiscal rules. The FFC replied that they were sufficient. The concern was with implementation. Work at the political-administrative interface was needed. There was a need to professionalise the public service. It was not a matter of who was appointed, but of people doing what they were supposed to do. There was instability at senior management levels of government. There were cycles of political changes. Implementation of strategies was destabilised. The aim was to create a stable and professional civil service.

Mr Snell asked about legislation for norms and standards. The superstructure of the state had to be redesigned. The FFC and the Public Service Commission had to engage about the kind of superstructure need for a developmental state. The best use of money had to be considered.

Mr Khumalo replied that there was not a base from which to measure progress made with programme realisation. Demands did not change. There had to be decisions about basic minimum performance standards that had to be met, so that service could justify grants. There were countries where people had to be attended to within a certain time limit at government departments, which had implications for resources. There had to be minimum standards.

Mr Snell remarked that wanting to deliver with a federal structure was like a company relying on retail prices for profits. He asked what improvements could be made to the state superstructure to move towards a unitary developmental state.

Mr Khumalo responded that there was nothing wrong with having a fiscally decentralised unitary state. But everyone had to know who the boss was. There were spheres with different responsibilities. There were sufficient institutional arrangements for a unitary state. It was so that there were institutional arrangements that constrained tourism and economic development. Only a few departments were technically cared for. It was difficult to assess, and perhaps university research could provide answers. But all in all South African financial institutional arrangements were working pretty well. The Constitution prescribed what the Minister of Finance was responsible for. The Intergovernmental Fiscal Act could provide guidance. There were a number of areas where local government did not feature. The question was whether participation of local government was effective. But overall the institutional arrangements were good. The FFC worked with the Public Service Commission.

Ms Mashego asked if there was something not right with water. One did not know what came from the Department of Water Affairs and what came from the Water Trading Entity. Basic services were not being addressed. There was an infrastructure break at municipal level. The question was how to know where the money went.

Mr Ghalieb Dawood, Budget Analysis Manager, FFC, replied that there would be an overview of the budget and performance of that Department in an FFC written submission.

Mr Khumalo added that if there were specific areas that the Committee wanted followed up, the FFC would prepare a response. Water was grouped with electricity as basic services. There were a range of water issues that had to be discussed. The Committee had to point out specific issues they wanted to debate. There were complexities in the water supply chain from the Department of Water Affairs to local government. If local government could not spend on water, money had to be taken back. There were people sitting in offices who were not working, but who were getting paid. People did not like the idea of the National Treasury withholding funds because of underperformance. Responsibility had to be devolved to district level, but there was a lack of capacity to deliver. The infrastructure was there, but water service was not delivered. The taps were there, but there was no water in them. There was a value chain challenge in Water Affairs. The FFC would come back to the Committee about water. There had to be capacity building and improved service delivery.

Ms Mashego said that the Committee was frustrated about water. There had to be a workshop.

The Chairperson remarked that Water Affairs had only spent 50% in the first nine months of the budget year, and then suddenly went up to 96% in the last three months. It was obvious that the money could not have gone to real service delivery. He invited the FFC to join the Committee when there was a workshop on water.

The Chairperson adjourned the meeting.

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