2013 Medium Term Budget Policy Statement: input by Financial and Fiscal Commission (FFC) & Human Science Research Council (HSRC)

Standing Committee on Appropriations

28 October 2013
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Financial and Fiscal Commission said Government had done a commendable job in beginning to implement the National Development Plan (NDP) via the 2013 MTBPS. Government was looking towards infrastructural investment as the principal driver for an upturn in economic growth. The current account deficit was projected to remain at levels above 6% of Gross Domestic Product (GDP). The revisions to economic growth confirmed FFC’s GDP projections. The FFC discussed the risks to the economic and fiscal outlook: public sector wage bill pressures, persistent underspending, negative external balance of the current account deficit, the robustness of global growth and domestic responses. South Africa fared poorly on many human capital indicators which as a result undermined NDP goals. The Commission welcomed the proposed adjustment to provincial conditional grants. The reduction in the EPWP grant had potential to undermine Government’s objectives of increasing employment to 14% and 6% by 2020 and 2030 respectively. The FFC commented on the performance of conditional grants, the Municipal Infrastructure Support Agency (MISA), district municipalities, the metros and fuel levy, stricter monitoring of expenditure and rollover requests. The Commission emphasised that shifting organisational location of grants from sphere to sphere or department to department would not necessarily improve grant performance. Shifting the RHIG would not necessarily improve grant performance. In the 2014 departmental strategic plans, FFC would like to see greater detail on what the next three years would contribute towards the 2030 Vision. This should be in the form of specific output and outcomes milestones achieved by the end of 2016/17 to gauge progress towards attaining the NDP vision. Government had done enough to stave off downgrades from rating agencies. However, there was much work to be done on improving the value-for-money and impact of public spending. These micro fiscal goals lie in the domain of individual portfolios and accounting officers of departments. It was crucial that Provincial Treasuries and Offices of the Premier drive improvements in financial management within provincial departments and municipalities.

The HSRC presented an overview of the presentation which focused on education, health, job creation, rural development, and economic development. The theme of the presentation was enhancing the effective utilisation of financial resources in institutions of higher learning and ensuring value for money in the budgets for public institutions. The problem statement of the Council indicated that education was the key for the social and economic development. High skills contributed their efforts to grow thought leadership, economic leadership and their aspiration for a knowledge economy.

In terms of education the presentation looked at funding, enrolments, success and graduation rates, and evaluate against the developmental goals of the country. In terms of the highlights of the educational level of the population the Council’s aspiration target was 10 million university graduates by 2030. At the beginning of 1996 to 2011 only 12% of over 20 year olds in the country had higher degree after grade 12, but the number had diminished of 20 year olds who had no schooling.

The report acknowledged that the National Plan for Higher Education and the National Development Plan were Government policies that had to respond to the society and the economy. The funding allocation for university sector was high compared to the skills sector, but the percentage of GDP was lower than that of other countries – to address historical backlogs it required higher share of funding. In comparison of higher education funding with other countries South Africa spent 0.6% of GDP on tertiary education. The participation rate in higher education in South Africa had increased from 15% in 2000 to 18% in 2010. The steady growth since 2005 suggested that the 20% target was likely to be met by 2015/16. The report concluded by comparing South Africa to BRICS countries in terms of infrastructure related indicators.

Members asked about the appropriateness of university qualifications, the number of engineers that had qualified, skills development in FET Colleges, and funding of universities.
 

Meeting report

Opening Remarks
The Chairperson started the meeting by apologising for Members who were not present in that meeting due to other meeting commitments. He informed the Committee that the purpose of that meeting was to be briefed by both the FFC and HSRC on the 2013 Medium Term Budget Policy Statement (MTBPS).

Financial and Fiscal Commission (FFC) submission on the 2013 MTBPS
Mr Bongani Khumalo, FFC Acting Chairperson, said Government had done a commendable job in beginning to implement the National Development Plan (NDP) which was an ambitious policy strategy for growth as a pre-requisite if South Africa was to move further on its transition to attaining its 2030 Vision. Government was looking towards infrastructural investment as the principal driver of whatever upturn in economic growth is anticipated. A corollary to relatively high growth in gross fixed capital formation forecast showed that the current account deficit was projected to remain at levels above 6% of Gross Domestic Product (GDP). The general economic outlook was that the economy remained vulnerable to slow global recovery and domestic challenges. The revisions to economic growth confirmed Commission’s GDP projections.

Mr Khumalo said the risks linked to the economic and fiscal outlook, were: the public sector wage bill pressures, persistent under spending, negative external balance and robustness of global growth. FFC supported the general discipline about in hiring additional Government workers. It remained important that Government productivity and service delivery remained at the core of recruitment. Frontline staff was core to service delivery and should be prioritised over general administrative positions. Under spending was R3.14bn at all levels of Government which undermined the impact of fiscal policy and long term economic growth (underspending usually on capital expenditure). The negative external balance of the current account deficit was projected at 6.5% of GDP in 2013. Diversification of exports remained important for robustness of global growth and domestic responses.

Looking at domestic challenges, infrastructure investment was pivotal in fostering and attracting private investment. The inadequacy of existing infrastructure, particularly with respect to port facilities, roads, rail, energy, water and sanitation hampered the country’s long run growth potential. It noted the role of the President’s Infrastructure Coordinating Committee (PICC) in this. Tax revenue buoyancy was a concern. Tax revenues to GDP ratio indicated a progressive decline in the buoyancy ratio. The Commission would continue to engage with the Tax Committee on this. Structural unemployment, skills constraints and health issues continued to be a problem in terms of human capacity. South Africa fared poorly on many human capital indicators which as a result undermined NDP goals. Governance was a concern as South Africa fared poorly on corruption and general inefficient or unproductive government expenditures. The Commission noted the establishment of the Chief Procurement Officer and emphasised the need to strengthen accountability and create consequences for corruption.

State-owned companies (SOCs) were expected to borrow on the strength of their balance sheet, rather than being funded from the fiscus. In addition to contingent liabilities there were also risks in greater use of user fees (such as e-toll fees for Gauteng Freeway Improvement Project). Some of the SOCs were making losses which were not to the benefit of South Africa in terms of infrastructure. The Commission noted the potential benefits of intensified use of public-private partnerships (PPPs). The Commission was of the view that PICC should assume leadership role in determining appropriate implementation mechanisms to ensure rapid rollout of infrastructure.

The MTEF Division of Revenue (DoR) for 2013 had been revised by R1.7bn which was mainly due to R1.3bn injection to the Provincial Equitable Share (PES) for inflation-related salary adjustments. The 2014 MTEF would be characterised by moderate growth with a real annual average growth of 1.02% projected.

Short–term initiatives for job creation included Expanded Public Works Programme (EPWP), Community Worker Programme, job fund and creating special economic zones. The long-term structural reforms included improving educational outcomes, boosting productivity of workforce and enhancing competitiveness of local firms. Education would grow by R34bn over the MTEF period, largely to fund increased cost of living adjustments. FFC said the focus should be on improving educational outcomes in line with NDP (teacher training, improved school management, greater accountability of school principals).

Health and Social Development allocations each grew by R31bn over the MTEF period, largely to fund increased cost of living adjustments, anti-retroviral drugs, new vaccine for cervical cancer and building forensic chemistry laboratory, and the increase in beneficiaries of grants, which aligned with FFC's
recommendation in its 2014/15 DOR submission. The FFC awaited the funding arrangements for the new reform and associated long term fiscal report. It noted the challenges with implementation of the NHI pilot studies.

FFC welcomed the proposed adjustments to Provincial Government Conditional Grants. The baseline was adjusted upwards by 0.6% from the 2013/14 baseline. It was concerned that the proposed downward adjustment over the 2013 MTEF to allocations of under-performing grants had been carried out without proper assessment and that might undermine grant objectives. FFC noted the underspending on the NHI grant which had potential to undermine full implementation of the scheme. Reasons for underspending included lack of planning, unpreparedness of pilots to fully absorb funds. The EPWP grant reduction had the potential to undermine Government’s objectives of increasing employment to 14% and 6% by 2020 and 2030 respectively. FFC noted the under spending in indirect grants relative to direct grants. National departments need to build capacity to adequately perform oversight and improve sub-national capacity building initiatives.

Other points made by the FFC included:
▪ FFC welcomed additions to Human Settlements Development Grant (HSDG) and additional funding to cover costs of salaries of Further Education and Training (FET) colleges
▪ FFC notes the inconsistencies in the performance of the Urban Settlements Development Grant
and under performance of the Rural Household Infrastructure Grant (RHIG). Changing this grant from schedule 6B to 5A is unlikely to improve performance.
▪ FFC supports in principle the funding of disaster relief and recovery through conditional grants. The process of immediate release of funds and declaration of disasters remains unresolved.
▪ Local government equitable (LES) share allocation to increase by 9.2% over the period and FFC welcomed greater funds distribution to poorer/more rural municipalities due to revised LES formula.
▪ Conditional grant funding to municipalities to increase by 23% over MTEF period. It noted the deliberate reprioritisation of funds away from underperforming grants to fund increase to the regional bulk infrastructure grant and integrated city development grant.
▪ FFC is concerned with the potentially severe underinvestment in social and economic infrastructure at the local government sphere due to structural financing problems and municipal inefficiencies. In this regard, the role of the Municipal Infrastructure Support Agency (MISA) to support infrastructure roll out and enhance capacity in municipalities is key
▪ The challenges of asset care (maintenance, refurbishment, rehabilitation) at local level required an integrated approach to unblock these.
▪ Capacity building grants should be linked to other capacity-related interventions (MISA) as well as sector-specific interventions (Approach to Distribution Asset Management - ADAM)
▪ Uncertainties about powers and functions of district municipalities should receive urgent attention.
These create ambiguities around expenditure assignment and appropriate financing instruments. The financial sustainability of these municipalities is a concern if such expenditure assignments are not finalised. The FFC advised that a lasting solution to this long-standing issue had to be implemented.
▪ FFC has been critical of the sharing of the General Fuel Levy instrument with metros due to its buoyancy. Metros receive a fixed share of around 23% of the general fuel levy. The revenue from the general fuel levy is revised to fall for 2013/14 and 2014/15, putting financial pressure on metros.
▪ FFC welcomes the review of the general fuel levy sharing along with all the own revenue funding
▪ Decrease in rollovers from R3.7 billion in 2010/11 to R894 million suggests stricter monitoring of expenditure and rollover requests.

Mr Khumalo concluded that FFC welcomed Government’s fiscal stance in the 2013 MTBPS. FFC emphasised that shifting organisational location of grants from sphere to sphere or department to department would not necessarily improve grant performance. The 2013 MTBPS began to address key challenges facing South Africa and signalled intent and purpose for NDP implementation. In the 2014 budget and departmental strategic plans, FFC would like to see greater detail on what the next three years would contribute towards the 2030 Vision. This should be in the form of specific output and outcomes milestones achieved by the end of 2016/17 to gauge progress towards attaining the NDP vision. From an aggregate fiscal policy perspective, Government had done enough to stave off downgrades from rating agencies. However, there was much work to be done on improving the value-for-money and impact of public spending. These micro fiscal goals lie in the domain of individual portfolios and accounting officers of departments. The capability of Provincial Treasuries and Offices of the Premier to drive improvements in financial management within provincial departments and municipalities was crucial.

Discussion
The Chairperson said the Minister talked about the devolution of housing funds directly to the metros but there was no mention of it in the presentation. FFC had attended their last meeting with the metros where it was clear that they were not ready or would not be ready to absorb those funds. He asked for comment.

Mr N Singh (IFP) asked with regard to the declining trend in economic growth, what impact would that have particularly on social programmes. The global economic crisis affected South Africa, but what suggestions could the FFC make for South Africa to improve domestic growth. How had we tried to counter the effects of the global crisis, what were we doing to insulate SA and how could we to promote domestic growth?

He asked if the environment was conducive within the country for private and international investors - noting the mining strikes and labour unrest in the country.

Mr Singh asked what government should do to counter the challenges and risks of poor budgeting and under spending. Had the FFC made any suggestions to Government about these?

He asked if the FFC assessed the contingent liabilities as it related to the land reform programme because from presentations they have received there were billions of rand needed in contingent liabilities to settle land claims, and for him those were the biggest contingent liabilities the Government had moving forward.

Ms R Mashigo (ANC) said that she was interested in the alignment of MISA with other programmes which might improve the performance of all the departments.

She asked what influence National Treasury had on removing the Rural Household Infrastructure Grant (RHIG) from the Department of Water Affairs to municipalities which were not fully capacitated since they had said they wanted to see the effectiveness of that grant. There should be clarity and visibility about direct and indirect grants in National Treasury and the departments so that the Committees could see them being spent. As public representatives they were clueless about this. As the Appropriations Committee they had approved the grant but during the financial year they did not know what happened to it which was not fair to them.

Mr L Ramatlakane (COPE) asked for comment about he implementation and integration of the NDP to all spheres of Government because there was a question about how they address the budget and the NDP in all spheres of Government, and the capacity to do that. He asked for comment on the capacity of the Health Department to implement the NHI pilot project. Was it the unpreparedness in terms of the human resources or the lack thereof because the sites were already identified? He asked for comment about rollovers coming down from R3.7bn to R800m. Was it because of monitoring or merely a did-not-use-it approach?

Response
Mr Khumalo said, in answer to the Chairperson, that slide 16 of the presentation indicated that they did have an interaction with the Department of Human Settlements. They had an interaction with the task team that was advising the Minister. They had an interaction with the Budget Council with the same task team representing the Department around that particular matter. They had also interacted with the South African Local Government Association (SALGA). FFC was convinced that the cities had built sufficient capacity over a period of time and were beginning to lose it because of the uncertainty associated with the process - whether it was actually going to happen. Some cities like Tshwane had put substantial amount of investment in preparing for that process but it never happened.

Therefore, one of the FFC recommendations in their submission was that Government had to provide some resources to ensure that the capacity was built in the cities that would receive that project. That was the one issue which came up in the MTBPS in terms of preparation. From FFC’s perspective they did not find anything particularly wrong with the process which warranted them to say no, they should not proceed. They had a checklist which they had tested. So, the Committee should be very comfortable that that process should go ahead. FFC had also dealt with the uncertainty associated with the process which created a lot of problems within the human settlements sector.

Mr Khumalo agreed with Ms Mashigo on the point of MISA which also needed to do more.

Mr Khumalo said that the FFC was opposed to the shift of the RHIG because they did not think shifting it to municipalities would solve the problem. They had looked at the problem of underspending with the Portfolio Committee at the beginning of the year where it was raised that there was potential for underspending (despite a cut via the adjustment budget). They were informed in that meeting that there were commitments and that money was definitely going to be spent. Ultimately there was a rollover of those funds. Therefore, they agreed with the joint position taken by the Portfolio and Select Committees. FFC had not changed its position on the RHIG.

The Chairperson said that since they were pressed for time, the remaining answers to the questions should be sent in writing by tomorrow. He thanked FFC for availing themselves to the Committee.

Human Science Research Council (HSRC) perspective on the 2013 MTBPS
Dr Olive Shisana, HSRC CEO, thanked the Committee for the opportunity to present to the Committee. She said that the presentation would focus on education, health, job creation, rural development, and economic development.

Dr Temba Masilela, Chief Director Education: HSRC, said that the theme of the presentation was enhancing the effective utilisation of financial resources in institutions of higher learning and ensuring value for money in the budgets for public institutions. The problem statement was that education was key for the social and economic development. High skills contributed to growing thought leadership, economic leadership and our aspiration for a knowledge economy hence the investments in higher education. The Committee had asked previously what was the value of this investment? The presentation would look at funding, enrolments, success and graduation rates, and evaluate these against the NDP developmental goals of the country. The twin challenges were the creation of the knowledge economy and poverty reduction and development.

Mr Masilela said that the aspirational target was 10 million university graduates by 2030. By 2011 only 12% of over 20 year olds in the country had higher education beyond grade 12, but the number of 20 year olds who had no schooling had diminished from 19% to 8%. Participation rates in higher education were shown per race group for the years 2003, 2006 and 2010. Overall the participation rate in 2010 was 17.3% and the target was 25% on 2016.

Mr Masilela said that the role of university sector was to provide high skills for the labour market which also raised the question of relevance and appropriateness of a qualification. The debate about qualification/ competences/ capabilities was continuing in terms of knowledge and patent production, and links with firms and communities.

Mr Masilela said that the National Plan for Higher Education and the National Development Plan were Government policies that had to respond to the society and the economy. Research and innovation by universities had a key role to play in improving South Africa’s global competitiveness. Innovation towards a knowledge-based economy with its Ten-Year Plan for SA also responded to the needs of society where universities could play a pivotal role in providing innovation skills and they would need to be strengthened. The New Growth Path targeted at least 30 000 additional engineers by 2014. The Strategic Infrastructure Project and the Industrial Action Policy Plan also played a role in improving the country’s global competitiveness. Universities did not have a well-established history of demand-side skills planning and were thus less responsive.

Mr Masilela said that in terms of funding the funding allocation for the university sector was high compared to the skills sector, but the percentage of GDP was lower than that of other countries – to address historical backlogs it required higher share of funding. The question was, did the funding match expansion plans? In comparison of higher education funding with other countries South Africa spent 0.6% of GDP on tertiary education in 2009 - which was the third lowest of 24 countries surveyed.

Mr Masilela said that in terms of enrolments and completions the challenge was to expand both the sector (from 938 000 in 2011 to 1.6 million in 2016) and to improve success rates. The expansion from 17.3% to 25% participation rate in 2016, with a limited funding base would be a challenge. Whether universities could meet the high skill expectation for the national priorities in the country was another challenge. The participation rate in higher education in South Africa had increased from 15% in 2000 to almost 18% in 2010. The steady growth since 2005 suggested that the 20% target was likely to be met by 2015/16. Although higher than the average gross enrolment ratio GER for sub-Saharan Africa, which was 6%, it was well below the average for Latin America (34%) and Central Asia (31%).

A 2011 picture of the university sector showed a head count of 938 000 with type of qualifications: Undergraduate degrees: 50.9%; Undergraduate Certificates and Diplomas: 30.1%; Honours: 9.2%; Master’s and Doctoral: 6.6% and fields of study: Science and Technology: 31%; Business and Management: 31%; Human and Social Sciences: 41%.

Mr Masilela presented a profile of graduates from the HE sector between 200 and 2010. The NDP target was 5000 PhD graduates by 2030.

Looking at health, Mr Masilela said the question that was always asked was how the functioning of hospitals could be improved. In terms of the equitable share most health and education delivery was a provincial function – except for 8 academic medical complexes which had a ring-fenced budget administered by NDOH. In addition to the R453 equitable share to provinces, conditional grants administered by NDOH including the R10 billion grant for treatment and care of HIV and AIDS and TB (“antiretroviral programme”).  2.4 million people were currently on treatment for HIV and AIDS increasing by over 500 000 each year aiming to reach 5 million on treatment with ARVs by 2016.

The National Health Care Facilities Baseline Audit 2012 assessed the quality of public hospitals and primary health care facilities revealed challenges for public hospitals. For example:
• Average compliance with National Core Standards functional areas & Ministerial Priority Areas for both hospitals and primary health care facilities is very low
• Only about a third of hospitals have Audiology and Psychology services
• Half of district hospitals do not have financial managers, and 40% do not have human resource managers
• Dental services in hospitals is lacking, and some district hospitals have no doctor input
• Availability of equipment and medicines is extremely poor
The challenges for public hospitals and opportunities for improving them in the short and medium/long-term were looked at.

On the theme of job creation, Mr Masilela said that unemployment was a national emergency based on the difficulty on international economic environment and domestic labour unrest, weak business confidence, and uncertain government policies. The large current account deficit was a challenge coupled with the large budget/fiscal deficit. Hence there was limited scope to expand public spending to stimulate economic growth and job creation.

How to accelerate economic growth and create more jobs
- Change composition of government spending:
- Transform government-business-labour relationships from adversarial to constructive
Some targets were missing such as:
• How many small businesses should be created? (rural/urban)
• How many young unemployed should be assisted to start their own small businesses
• How many NGOs to assist in their employment enhancing and creation
• What concrete plans are in place to create the target employment?
Also discussed were the Comprehensive Rural Development Programme, National Rural Youth Service Corps (NARYSEC), recapitalisation and development programme, rural infrastructure development, agrarian reform, land transfers, unequal spread of farmer support.

Finally, Mr Masilela addressed the 2013 MTBPS Infrastructure Investment by comparing South Africa to BRICS countries in terms of these infrastructure related indicators: the Gross Fixed Capital Formation (GFCF); Total Capital Investment; Capital Investment per capita; and Infrastructure Industry Value as a percentage of GDP. For all four indicators South Africa’s performance over the past ten years had been relatively weak. Gross fixed capital formation in SA was expected to increase by only about 4% in 2013, mainly driven by public sector infrastructure projects. This compared unfavourably with other BRICS countries. HSRC posed these questions:
• Will the current level of public infrastructure investment in SA meet the NDP targets?
• Other BRICS countries seem to have higher levels of infrastructure investment and achieved higher levels of growth & development
• What are the impediments in SA and how can these be overcome?
• What are the best ways to finance infrastructure that do not threaten private investment and therefore growth in the long run?

Discussion
Mr Singh asked if the presentations had been made to the relevant Portfolio Committees in Parliament because when they talked about budget adjustments, it started there with Portfolio Committees recommendations made to the Appropriations Committee.

He asked with regard to the appropriateness of the university qualifications, if the Council was satisfied with their relevance. Was there going to be a paradigm shift in the future to ensure that there was alignment between qualifications and what was required in the private sector?

He asked if HSRC research had established where they were with engineers because it had been said that there would about 30 000 qualified engineers by 2014.

He asked if the health audit was a sample or full audit about all that was lacking at health facilities. If it was a full audit, it gave them a better picture of what was lacking out there.

Mr Ramatlakane appreciated the presentation. He asked what it was that should be done for the Higher Education and Training Department to come to the party in terms of skills development at FET Colleges because the presentation showed outputs only for universities.

He asked what it was that was being done to address budgeting versus expenditure in education because the country had a higher budget for education comparatively but when it came to expenditure, the outcomes left a lot to be desired.

He asked for comment on the R860bn public investment over the three-year Medium Term Expenditure Framework (MTEF).

Ms Mashigo asked what it was that they lacked about job creation because they had all the programmes and systems in place for poverty alleviation.

The Chairperson asked if the qualifications of educators in FET Colleges were checked by the Council because there was uncertainty around that issue.

The Chairperson asked if the universities were part of the 10 year plan that was mentioned in the presentation because he was not clear about that.

The Chairperson asked if the disparities experienced at the so-called black universities contributed to the outputs of those universities and were because of funding. Currently there were protests in some of those universities.

Dr Shisana responded that the HSRC had been invited to brief different parliamentary committees just as they had been invited by the Appropriations Committee.

Dr Shisana said that the health audit had looked at public hospitals. By and large all public hospitals in the country were looked at. There were the views of the service provider and that of the person who received those services. Those two had different viewpoints in how they perceived the health care system.

Dr Shisana said about the NHI not being indicated in the MTBPS that, yes, it was a question that needed to be asked. Why was it not indicated? Or why was it not said what was supposed to have happened to it? In terms of the NHI pilot projects, there had been few budget cuts. Again it was a question in terms of the rate of expenditure, that funds that were not spent, tended to be moved elsewhere.

Dr Shisana said on the National Core Standards that she had not seen performance audits of other countries.  What she had seen were the patient satisfaction surveys from different countries, and they were not different from countries like Canada. They were not different in terms of public perceptions. Perceptions were generally similar in many countries – except in areas where people had to pay a lot of money to get health care.

Dr Shisana said they had a very good relationship with many universities in the country and had signed Memoranda of Understanding (MoU) with them. In those MoU, one of the things they looked at was the question of sharing information and they also did joint research. They were sharing information which arose from the big studies that they have done together such as the South African National Health Nutrition Examination Survey where they worked very closely with universities on HIV/AIDS to try to understand the situation. They did share their information with Government as it was the one that made the policies.

Dr Shisana thanked the Committee for sharing information and challenges which can be incorporated into the research and studies that HSRC has been conducting.

The Chairperson said that the remaining questions should be responded to in writing and be sent to the Committee by tomorrow. He thanked the HSRC delegation for the presentation.

The meeting was adjourned.
 

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