Division of Revenue 2014/15: Financial and Fiscal Commission Annual Submission

Standing Committee on Appropriations

30 July 2013
Chairperson: Mr C De Beer (Northern Cape, ANC) (Acting); Mr E Sogoni (ANC)
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Meeting Summary

The Select and Standing Committees on Appropriations met jointly to receive a briefing from the Financial and Fiscal Commission (FFC) on its Annual Submission for the 2014/15 Division of Revenue. In an introductory statement, the Acting Chairperson emphasised the important role of the Financial and Fiscal Commission, and emphasised that division of revenue was inextricably linked with production of revenue through economic growth, the payment of taxes and increased employment. It was noted that the FFC presentation was given in terms of various legislative mandates.

The overarching theme underpinning the submission was that of fiscal levers for national development, informed by and aligned with the National Development Plan. The submission was divided into three interrelated parts emphasizing the national, provincial and local spheres of government. FFC stated that national levers for inclusive growth in a post crisis fiscal response included budget consolidation in South Africa, the economic and social value of social grants, funding of the South Africa Further Education and Training sector, financing research in higher education and the evolution of conditional grants. The provincial fiscal levers in relation to state capability and performance included assessing and improving fiscal performance of provinces, managing the provincial wage bill to contain fiscal stress and build a capable state, effective devolution of transport functions to municipalities, and effective intergovernmental planning and budgeting. The local government drivers towards collaborative governance for effective and sustainable municipalities included measuring fiscal stress in South African local government, improving performance of municipalities through performance based grants, challenges, constraints and best practices in maintenance and rehabilitation, and a collaborative effort to enhance revenue generation in rural municipalities.

Members asked if the FFC was going to extend this briefing to the various Provincial Legislatures, which was confirmed, and the FFC sought the support of the Appropriation Committees during the process.  Members asked questions relating to the structure and review of conditional grants, the use of independent experts and the alignment of the FFC’s research and recommendations to the National Development Plan. Members asked why there was very little information in the presentation about the impact of the global economic meltdown and the disadvantages of decentralisation. They wondered why the FFC did not make any recommendations relating to the regulatory environment and asked if National Treasury had responded, and if so, the general feeling on the recommendations.

An official from the National Treasury reported that the National Treasury and the FFC were engaged in technical discussions and the involvement of the relevant national department and provinces was being solicited. The results of these consultations would be consolidated and sent to Cabinet, which would then adopt that to become the formal response of government. Members were also reminded that the detailed report contained a response by National Treasury to previous recommendations of the FFC, and Members agreed to host a meeting with Ministers, National Treasury and the FFC to tackle these issues.
 

Meeting report

Election of Acting Chairperson
The Committee Secretary, Mr Lubablo Nodada, informed Members that the Chairperson of the Select Committee on Appropriations, Mr T Chaane (North West, ANC) was absent and according to the Rules of Parliament, the Members had to elect an Acting Chairperson. Having asked Members of the Select Committee to nominate a candidate to act as Chairperson, Mr C De Beer (Northern Cape, ANC) was nominated, seconded and accepted, and took over as Acting Chairperson, assisted by Mr E Sogoni (ANC), Chairperson of the Standing Committee.

Introduction by the Acting Chairperson
The Acting Chairperson noted the apologies. He emphasised the important role that the Financial and Fiscal Commission (FFC) played in analysing what happened in the past and what would happen in the future. The briefing and discussions were going to speak on the Division of Revenue (DOR). He emphasised the intrinsic link between division of revenue and production of revenue, through economic growth, the payment of taxes and increased employment. He cited that whilst Italy and Spain were going through difficult economic times, with unrest over unemployment, Germany, which was one of the most industrialised countries in the world, was providing millions of jobs to its own and foreign young people. There were many lessons to learn from the global fraternity. The main goal for South Africa was to get its people skilled and to produce skills for the market.

Financial and Fiscal Commission briefing on its Submission for 2014/15 Division of Revenue
Mr Bongani Khumalo, Acting Chairperson and Chief Executive Officer, FFC, said that the presentation was made in terms of the relevant sections of the Constitution, the Intergovernmental Relations (IGR) Framework Act and the Money Bills Amendment Procedure and Related Matters Act. The overarching theme was fiscal levers for national development, and his submission was divided into three interrelated parts which covered the national, provincial and local spheres of government.

Fiscal levers for national development
Mr Khumalo noted that these levers were informed by the National Development Plan (NDP). National levers for inclusive growth in a post crisis fiscal response included budget consolidation in South Africa, economic and social value of social grants, funding of the South Africa Further Education and Training sector, financing research in higher education and the evolution of conditional grants.

The provincial fiscal levers, in relation to state capability and performance, included assessing and improving fiscal performance of provinces, managing the provincial wage bill to contain fiscal stress and build a capable state, effective devolution of transport functions to municipalities, and effective intergovernmental planning and budgeting.

In terms of local government, the drivers for collaborative governance for effective and sustainable municipalities included measuring fiscal stress in South African local government, improving performance of municipalities through performance based grants, challenges, constraints and best practices in maintenance and rehabilitation, and a collaborative effort to enhance revenue generation in rural municipalities.

Dr Ramos Mabugu, Research Director, FFC, went on to deliver the details of the various levers and drivers.

Budget Consolidation in South Africa
In relation to budget consolidation in South Africa, Mr Mabugu said that, following the 2008/09 crisis, economic recovery had been slow, which was then further exacerbated by the inability of the economy to create jobs, and the recent industrial unrest and credit downgrades. The premise of the research was that sound public finances were a prerequisite for sustainable economic growth and for maintaining welfare. The major question which had to be asked was whether the South African government should be pursuing spending cuts and/or tax increases in order to consolidate its budget. Mr Mabugu presented to the Committee a graph showing the budget deficit as a percentage of GDP and the pros and cons of fiscal consolidation.

On budget consolidation in South Africa, the FFC recommended that government should continue its efforts to moderate growth in expenditure components such as the public sector wage bill, which presently constituted 60% of government expenditure, since decreases in government expenditure increased the probability of a successful fiscal consolidation in South Africa. More effort had to be made to improve effectiveness of public finances, through greater and more rigorous oversight, to ensure elimination of fruitless, wasteful, and unauthorised expenditure, and corrupt practices in managing public finances. Government had to explicitly consider economic growth as an important factor for fiscal consolidation.

Economic and Social Value of Social Grants
Mr Mabugu said it was necessary to consider the economic and social value of social grants. South Africa (SA) was an upper middle income country, yet social indicators resembled those of a lower income country. Government had followed policies that promoted poverty alleviation without ameliorating unemployment. Given social deprivation and limited fiscal space, it was important to ask if it was now apposite to reform Child Support Grants (CSG), and to consider whether there were enough steps being taken to include eligible children in the system. He then presented to the Committee the social grant expenditure by type from 2007/08 to 2013/14 and a graph showing the growth of child support grant between 1999 and 2012. He stated that CSG was the largest social assistance programme in South Africa, growing from 2%  to 3.5% of GDP between 1994 and 2006.

FFC recommended that government should make more resources available through the transfer system to enable progressive realisation of an ideal child support system. An ideal child-support system was a system that relaxed the existing means test and moved towards faster universalisation of the CSG. This should happen even under fiscal consolidation, because of social and economic benefits. The FFC also recommended that government should put in place a system to ensure that coverage was extended to children currently excluded from accessing the CSG for administrative reasons.

Funding of the Further Education and Training (FET) Sector
Mr Mabugu said that a well-functioning post-school education system was a key lever to break out of poverty and inequality and sustain a higher development trajectory. An effective FET college system was a critical component of a well-established post school system. FET colleges were migrating from the provincial to national sphere and it was important to have discussions around the key issues yet to be considered for full transfer of FET functions, in line with the requirements of the FFC Act. He presented the Committee with a graph detailing FET colleges’ funding between 2010 and 2014 and provincial distribution of Medium Term Expenditure Framework (MTEF) allocation estimates for 2015-2016.

Here, the FFC’s recommendation was that the transfer of the FET function to the Department of Higher Education and Training (DHET) should include development of sound systems and uniform templates for financial reporting, designed to ensure that DHET could proactively monitor the financial health of FET colleges. This should be complemented by holistic interventions to improve fiscal governance in FET colleges, including recruitment of appropriate skills, on-going training, and credible financial systems and processes.

Financing Research in Higher Education
South Africa’s gross expenditure on research and development was considered to be the highest in Africa although this status was also very low when compared to the other BRICS countries, Brazil, Russia, India and China. In 2004, SA introduced a new funding framework for research and tuition in all institutions of higher education. Little research had been conducted to evaluate the funding frameworks’ effectiveness and whether actual research outputs from universities and technikons had increased significantly. It was important for the government to evaluate the effectiveness of current government funding frameworks for higher education research. Mr Mabugu presented the details of the total per capita research output for the various higher education institutions in South Africa.

FCC recommended that a review of the current funding framework for higher education research be done, and that the Department of Higher Education and Training should redesign and allocate specific funds in the MTEF budget to the research development plan. The DHET should also reassess the appropriateness of targets and if necessary, adopt differential targets for each university or university of technology.

Evolution of Conditional Grants
Mr Mabugu told the Committee that conditional grants had been used increasingly as a mechanism to transfer funding to provinces and municipalities for the purpose of achieving particular national government policy objectives. The FFC had a long history of studying the use of conditional fiscal transfers in its various submissions made on division of revenue. The FFC’s 10-year review of conditional fiscal transfers to provincial governments and municipalities found that the application of conditional grants had evolved substantially over time.

In making its recommendations on the evolution of conditional grants, the FCC reiterated five key principles established for grant administration:
-Introduction and termination of grants: Mandatory, systematic processes were required for design/planning of grants and independent evaluation of grant performance was required when grants were terminated or merged with other grants
-Transparency in the criteria used to allocate conditional grants: Criteria, measures, baselines and division of grant allocations must be transparent
-Importance of non-financial performance data: Reporting on delivery should form the basis for awarding grants
-Achieving results-based accountability through incentive-oriented grants: Grants should be used to create a competitive service delivery environment
-Rethinking the financing of natural disasters: Changing climate patterns required Government now to re-evaluate institutional responsibilities for plans and financing of disasters

Mr Mabugu said that the efficacy of conditional grants must be reviewed, specifically in relation to necessity and purpose of some of the grants, as well as the criteria for allocations, targeting, reporting on non-financial data, performance, and value for money. The National Treasury (NT) should build capacity of transferring national departments for effective grant design, monitoring and evaluation to ensure that guidelines were adhered to.

Assessing and improving Provincial Fiscal Performance
Mr Mabugu told the Committee that provincial fiscal performance was vital to maintain fiscal sustainability. There was a rising need for basic services and low revenues threatened fiscal sustainability. Policy makers in SA were divided on the extent of provincial fiscal performance. Poor fiscal performance appeared to be mostly attributable to internal factors, such as expenditure management, maladministration and wasteful expenditure.

The Committee was presented with the composite fiscal stress index. In this regard, the FFC recommended that national and provincial treasuries should put in place an agreed-upon measurement and assessment framework for fiscal performance, against which provinces would be evaluated. Government should consider reducing or replacing the minimum allowed threshold for over and under-expenditure with relative inflation-adjusted figures, to avoid “budget creeping”. National and Provincial Accounting Officers should rigorously enforce Section 86 of the Public Finance Management Act (PFMA), which provided for instigation of criminal and disciplinary proceedings for persistent contravention, especially for wasteful and unauthorised expenditure; and urged that, where individuals were found guilty, consistent sanctions should be applied. Provincial treasuries must carry out mandatory expenditure reviews (overseen by an independent expert) after every MTEF cycle, specifically focussing on composition, efficiency, economy and effectiveness of expenditure as well as access to services and re-alignment of spending with programme objectives and delivery targets

Managing the Provincial Wage Bill
The FFC noted that the public sector wage bill had remained the largest component of government expenditure, with provinces accounting for the largest component of personnel expenditure. The key questions which had to be asked included:
-what were the underlying causes of growth in the wage bill
-were increases due to increases in staff establishments
-was there an appropriate mix of skills
-were increases in the wage bill commensurate with productivity
-did these increases result in economic growth?
A graph was tabled which outlined the key findings relating to the provincial wage bill and the posts filled in addition to staff establishment.

FFC recommended that a transition over the medium to long term was required, towards a more appropriate balance between wage and non-wage components of provincial budgets for social spending, starting with education and health. This should be in the form of national sector departments setting a norm or ratio for frontline versus administrative staff to total expenditure per sector, alternatively by  specific occupational categories, and developing accurate and up-to-date management information systems to monitor employee compensation expenditure against those norms.

Mr Mabugu further outlined the levers, drivers and recommendations related to intergovernmental planning for better outcomes, measuring fiscal stress in local government, performance-based grants to improve municipal performance, best practices in maintaining water and electricity distribution infrastructure and revenue enhancement in rural municipalities.

Ms Tanya Ajam, Commissioner, FFC, stated, in conclusion, that the FFC’s annual submission was a product of an 18 month research cycle. The presentation had given the Committee a lot of information. The FFC’s fear that the recession might continue longer than initially anticipated and that growth would remain sluggish seemed to be materializing, as the global recession mutated into not only a financial crises. FFC knew that money was going to be extremely tight, and there were incidents of fiscal stress at local and provincial government level. Besides fiscal sustainability, municipalities and provinces had to be politically sustainable, not only for the progressive realisation of socio-economic rights, but also to fulfill the NDP goals and objectives. To do this, the rate of growth had to be increased and the very nature of growth had to be changed. 

Discussion
The Acting Chairperson asked if the FFC was going to repeat this briefing to the various Provincial Legislatures.

Mr Khumalo replied that the FFC had informed the Provincial Legislature that it was available, and was going to start with Limpopo, which was the first province to respond. The FFC intended to present to all the nine provinces but it was going to be very helpful if the Committee could facilitate the process.

The Acting Chairperson confirmed that the Committee was willing to support the FFC along the process.

Mr B Mashile (ANC) said that it looked as if the FFC could have been in the middle of its report when the NDP was approved. He asked if the proposals and recommendations were aligned with the NDP.

In relation to conditional grants, he felt that there was need for research on conditional grants which were implemented and terminated. Research also had to be done on the conditional grants which were implemented and whose nature was later changed. He asked about the performance and spending trends of these grants, and whether the initial objectives had been achieved.

Mr Mashile noted the suggestion of an independent expert on expenditure reviews, and asked what sort of independent expert was envisaged and what type of “ independence” was referred to.

Mr Mashile said that he had a problem with conditional grants incentives. Municipalities were not equal in terms of skills and capacity and these incentives were just a subsidy scheme for municipalities that had the capacity to spend. It was just another way of getting the metros to get more incentives. He did not agree with the FFC when it said that there were no early warning systems in municipalities. He thought that the problem was that many people were just lazy, inefficient and incompetent.

Mr J Gelderblom (ANC) asked what the view of the FFC was on the South African school system and curriculum.

Mr Gelderblom referred to maintenance in municipalities, saying there was a lot which had to be done but the big thing with maintenance was that it created new jobs.

Mr Gelderblom thought it was the place of the FFC to encourage the establishment of research units.

Mr A Lees (KwaZulu Natal, DA) said that the FFC was doing a tremendous amount of work and the presentation was at a high level. He hoped that the detail was contained in the report; one example of the type of detail that he needed was a breakdown of the general comments about the disadvantages of decentralisation. There were many issues which were raised in the presentation which required huge national debate and discourse.

Mr Lees said that the FFC dealt with the impact of the global meltdown and many other global issues, but it was very narrow in terms of its recommendations especially relating to the regulatory environment. He asked what the FFC’s mandate allowed it to make recommendations on.

Mr Lees asked for more detail on what FFC meant in saying that changes should be made to the Disaster Funding Model. He said that the FFC had done a lot of work on equitable share and much had been said in that regard yet the Free State Provincial Department of CoGTA continued to create its own grants which skewed the whole formula. He hoped that there were some recommendations to that problem in the report. He also wanted to hear more about the consequences for the misappropriation of equitable share and conditional grants. He said that he hoped that the detailed report was going to answer many of his questions.

The Acting Chairperson said that the detail report was circulated to Members quite a long while before the meeting.

Mr G Snell (ANC) congratulated the FFC for the good report, which was a reflection of the sterling work it was doing. He asked what length of time the National Treasury had to respond to the recommendations of the FFC, and whether in fact National Treasury had already responded to the recommendations. There were some very pertinent issues raised and a response was needed. The Committee also had to ensure that many of these recommendations were taken on board.

Mr Snell asked if, in the formula for the equitable share, there was any budget for maintenance. He was asking this because although the provinces and municipalities were appropriating, the funds came from the national government, as the ability for provinces to raise their own revenue was extremely limited.

Mr Snell pointed out that roads were the backbone of the economy, and wanted to know how to ensure that the provincial roads infrastructure was maintained at a country-wide standard.

Mr Snell wondered also if there  had been any study to shed light on the required environment for the rolling out of the NDP.

The Acting Chairperson reminded Members that in the detailed report, there was a response by the National Treasury to the previous recommendations of the FFC. He said that it was necessary to organise a meeting of the “finance family” with the Ministers, National Treasury, FFC, and others to tackle these issues.

Mr L Ramatlakane (COPE) asked what the general feeling was in the consideration of the recommendations of the FFC by the National Treasury.

Mr Ramatlakane noted that during a recent oversight visit to the University of Limpopo, the university management expressed frustration about the capacitation and consideration of previously disadvantaged universities. He asked whether FFC had a specific response n that. He wondered also if rural-urban migration had an impact on school and educational infrastructure and student-teacher ratios.

Mr Ramatlakane asked if there was a future projection on the impact of the census results in respect to the FFC recommendations on grants and subsidies, and asked for clarity as to whom the FFC was directing its recommendations.

Mr Khumalo noted that some of the questions from the Members were quite similar, some of them were just matters of clarification and quite a number of them were just comments and remarks.

Starting with the last question, Mr Khumalo replied that every FFC recommendation was directed towards the executive authorities at all spheres of government.

In relation to the comments on alignment with the NDP, he stated that the FFC operated as a Commission with a strategic objective of working with foresight, so when the NDP’s founding plan was tabled, the FFC actually picked up a few issues from there which were used for guidance. The FFC was confident that the NDP was going to be adopted, so the alignment to the plan had been previewed. As the FFC proceeded in the future, its research and recommendations were going to be guided by the objectives of the NDP.

Mr Khumalo agreed there was a need for a review of conditional grants, relating to the introduction, merging or discontinuing of the grants. The approach was currently undermining the credibility of the conditional grants mechanism, and the issues had been raised and debated with National Treasury, and there was agreement that there had to be a change in the approach to conditional grants.

Mr Khumalo clarified that when suggesting the use of an independent expert, the FFC was referring to somebody whose view was objective, and who was therefore situated outside the concerned department.

On the issue of incentives, Mr Khumalo agreed with Mr Mashile that the incentives were often raked by the bigger municipalities. The way incentives had been introduced into the system had just one dimension, and that was rewarding municipalities. That was wrong because incentives had to be looked at as a set of issues which affected organisational behaviour, and this should include legislation and municipal support. The new system of conditional grants had to change the thinking that incentives were only about giving people money. On the issue of early warning systems, it was important to note that many of the failings in municipalities were not just financial.  In this regard, the FFC was looking at a whole range of factors in creating an index to monitor the performance of municipalities.

Mr Khumalo wanted to put decentralisation in the context of this briefing and noted that with a decentralised system and an outcomes based approach, the alignment was not going to be the same. There had to be real changes to ensure proper alignment on issues of accountability. The point was not to debate whether fiscal decentralisation was good, but FFC was saying that in reality there was a government which was fiscally decentralised, with different levels of accountability. An outcomes based approach thus had to cut across from national levels, through provinces and down to municipalities. The budgets and fiscal arrangements had to be aligned for the various outcomes.

Mr Khumalo confirmed that the detail on the impact of the global meltdown was in the report which had been tabled to the Committee. There was also a policy brief which had been presented to the Committee which covered the issue.

On the issue of disaster funding model, he noted that a Disaster Management Amendment Bill was to be introduced and quite a number of the issues relating to this matter were contained in a submission which the FFC made in 2012. There was a new submission which the FFC was going to be making to the relevant department on the disaster funding model. Mr Lees had raised genuine concerns and the FFC had tried to address them in the submission which had been made.

With regards to the timeframe, he noted that FFC was currently in discussions with the National Treasury and certain recommendations would be taken forward, after very technical discussions on quite a number of issues. Mr Khumalo said that, in all honesty, he had to point out that some of the matters happening today had been the subject of FFC recommendations already in 2000. FFC was quite involved in following up consideration on, and incorporation of may recommendations with many of the portfolio committees in Parliament, including those on Human Settlements, Cooperative Governance and Energy.

Mr Khumalo said it was difficult to answer what should be norms for maintenance, but the review of the Local Government Equitable Share formula, which was completed together with the National Treasury, had a very direct account for maintenance. This meant that if there was the need to hold somebody to account, when under-spending on maintenance was seen, serious questions were going to be asked. Through its benchmark exercises, National Treasury could also pick that up.

On the provincial equitable share, it was unfortunate that there was not a direct indicator because the idea was that some of the issues were addressed through the allocation formula, which was more or less a basic component which was supposed to take care of such issues. He agreed that there was a need for norms and uniformity in relation to equitable share formulae. The FFC was putting together a programme to engage with key stakeholders on the provincial equitable share formula and its appropriateness.

Mr Mabugu responded on issues around the global economic crisis and the recommendations on regulatory issues. FFC made recommendations on regulatory issues, in the form of medium term budget policy statements or specific requests, especially in relation to administered prices such as water and electricity. It also, though it did not generally prefer this, used the technique of regulatory impact assessment to look at methodology and routine implementation, in conjunction with the Commission’s modelling resources.

The Acting Chairperson requested National Treasury to make comment.

Ms Wendy Fanoe, Chief Director, National Treasury, said that although National Treasury presented responses to the FFC, this was not necessarily the full response. As pointed out by Mr Khumalo, there were technical discussions between the two institutions to move things forward. Simultaneously, where recommendations related to different matters, there would be processes put in place to consult with all relevant departments and provinces on those issues. The result of these consultations were consolidated and sent to Cabinet, and once this was adopted, it became the formal response of government. It was also important to note that some of the recommendations were not going to be implemented by National Treasury, but by the responsible national departments.

The Acting Chairperson said that the Committee had to establish its oversight role and to confirm that the oversight was being done in the right way, and to also confirm whether the correct monitoring tools were in place, whether the right questions were being asked and whether enough oversight visits were being conducted to see that everything was on track. At the end of the day, the responsibility came back to politicians to ensure that everything was working well.

The meeting was adjourned. 
 

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