2015 Division of Revenue Bill: Financial and Fiscal Commission submissions

Standing Committee on Appropriations

04 March 2015
Chairperson: Mr S Mashatile (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) presented its submissions on the 2015 Division of Revenue Bill, noting that government's response to the 32 recommendations had been positive and the consultation process was greatly appreciated, but what was now required was an implementation plan for each of those recommendations.

The FFC continued to receive plaudits from the World Bank for the work that it did to ensure that budgets were plausible, pro-poor and focused on service delivery. The FFC continued to stress strongly that anyone receiving a grant should have been previously identified as needing such a grant and achieve actual benefit from it. The current division of revenue was a careful balancing act in which there was great focus on local government, and although urban municipalities received significant focus, the rural municipalities were not being marginalised. Both the Provincial Equitable Share and conditional grants continued to grow above inflation, which was a good sign for service delivery. In the National Fiscal Framework, there was real growth in indirect transfers to sub-national governments over the 2015 Medium Term Expenditure Framework (MTEF) period, which was welcomed as it was intended to expedite service delivery. R3.3 billion had been ring fenced within the Department of Human Settlements to continue with upgrading of human settlements in mining towns of six provinces, although the FFC also recommended that government should pay more attention to provision of rental stock in mining towns. In the education sphere, a new grant, the Maths, Science and Technology Grant, had been created from a merger of two older ones and it had been allocated R18 billion over the MTEF. The FFC cautioned that the National Health Insurance (NHI) initiative must also not create incentives for inefficiency as it unfolded, and urged strong and constant communication with parliamentary committees. The public wage bill needed to be reviewed, and space would be needed for this to unfold, and particularly to weed out "ghost workers" and curb expenditure. The institutionalisation of the Built Environment Performance Plans (BEPPs) as a tool to foster spatial development and planning within metros, was welcomed, and rapid transport system corridors should encourage people to live near these centres. It also welcomed the two-year lead planning for Provincial Road Infrastructure Grants and recommended that this system be emulated by other departments. Provincial Equitable Share formulae had been updated, which was seen as a positive sign that should continue, although provincial allocation adjustments would continue to be phased in. In relation to the five Department of Health conditional grants that had been revised downwards, the FFC stressed that reasons for under-spending must be explained. Overall, the FFC welcomed the recommendation to introduce spending and efficiency targets.

Members were appreciative of the work of the FFC, but expressed concerns that funding to provide grants was coming from fewer and fewer people. They questioned how the FFC could forecast rises above inflation when that figure was as yet unknown, and asked how downward revisions would affect the poor, pointing out that although more efficient spending was key, many departments still lacked the ability to implement this. They asked about the effect of taking back the grants, and wanted more detail on the performance-based allocations, as well as commenting that incentives were needed for performance rather than planning. Overall, more capacity was needed and Members suggested that provinces and municipalities must explain any under-spending, and perhaps that the Committee needed to have more intense and regular oversight focus. Members asked for the reasons behind downward trends, where these were seen. The FFC answered that the social security grants must be viewed as a package and each would have to be balanced, whilst government would certainly need to tighten its belt. Skills audits were to be done in municipalities, and performance allocations were intended to incentivise planning, as other incentives for performance were already in place. FFC expanded further on the tax system, and commented that previous priorities were also being respected. The National Treasury finally explained how the seed money to municipalities would be paid, and encouraged FFC to keep better oversight over provincial spending.
 

Meeting report

2015 Division of Revenue Bill: Financial and Fiscal Commission submissions
Mr Bongani Khumalo, Chairperson, Financial and Fiscal Commission, introduced the submissions of the Financial and Fiscal Commission (FFC) on the Division of Revenue Bill (DORB or the Bill) for 2015. He noted that the FFC put a lot of work into the process, scrutinising the plans to assess where efficiency gains could be made. The idea was to have as minimum negative impact on service delivery as possible. It was therefore important that when the FFC looked at what the budget proposed, it would look carefully at the effect on the poor, and ensure that they, in particular, would not be neglected or disadvantaged.

The World Bank was happy with the social security grant system that had been created in South Africa. The people that benefitted from the social net should be those who were specifically targeted in the first place, and the FFC's careful balancing act in the past had in fact protected the poor.

Certain functions had been moving quite fast - such as education - but here again the work that was done was balanced so that there was no loss in impact. With the amendment of the Financial and Fiscal Commission Act, a buffer had been created. The National Health Insurance (NHI) initiative must also not create incentives for inefficiency as it unfolded. The public wage bill needed to be reviewed, and Mr Khumalo would like Parliament to give space for this to unfold. The "ghost workers" in the wage bill needed to be weeded out. Whilst the current budget did contain a specific focus on urban municipalities, this was not at the  expense of rural municipalities.

Dr Ramos Mabugu, Director, FFC, continued with the presentation, highlighting more specific areas for comment. The FFC had welcomed the institutionalisation of the Built Environment Performance Plans (BEPPs) as a tool to foster spatial development and planning within metros. The rapid transport system corridors would hopefully incentivise people to live along or close to these transport centres. It should be rolled out to other municipalities and spheres of government.

He noted that Provincial Road Infrastructure grants would now be subjected to a new two year lead planning and performance based framework. The recommendation of the Commission was that other departments should not "re-invent the wheel" but follow this good example.

FFC noted that the Provincial Equitable Share (PES) baseline continued to be affected by a series of functions and funding shifts. The FFC recommended that there should be dialogue with the Committee first before going ahead with legislative changes such as the National Health Act. 

The main point in the National Fiscal Framework was the real growth, in the 2015 Medium Term Expenditure Framework (MTEF) period, in indirect transfers to sub-national government departments, especially local government. The strong growth in indirect transfers was welcomed if the objective was to expedite service delivery. The overall 2015/2016 provincial fiscal framework was revised downward by R1.4 billion.  Despite this, both PES and conditional grants would continue to grow above the rate of inflation. The FFC should see improvement in service delivery due to these high growth rates. The PES formula had been updated with 2014 mid-year population estimates, October household surveys and health sector data. The FFC continued to support regular updating of the formula. The Census 2011 data showed that some provinces had lost people whilst others had gained. The phasing in of provincial allocations had been extended for another year, to 2016/17. The reason was that stability was required first and foremost, and the Commission did not want to put service delivery at risk.

In relation to human settlements, Dr Mabugu noted that R3.3 billion had been ring fenced within the Department of Human Settlements (DHS) to continue with upgrading of human settlements in mining towns of six provinces. The Commission recommended that government consider rental options, as not everyone wanted to own a house in the mining areas.

Five Department of Health conditional grants had been revised downward, by over R770 million, due to re-prioritisation and under-spending. It was paramount that the Commission should be provided with good evidence as to why there was under-spending.

For education, the main points were positive. A new grant, the Maths Science and Technology Grant, had been created from a merger of two older ones and it had been allocated with R18 billion over the MTEF.

Over the 2015 MTEF, local government would receive R313.7 billion in both conditional and non-conditional grants. The local equitable share (LES) allocations continued to experience positive real growth into the MTEF, of 5.6%. The LES was growing quicker than inflation and the Committee should see an improvement in service delivery, not a drop off, due to this.

Finally, Dr Mabugu summarised that the responses to the Commission's 32 recommendations, from government, had been excellent and the FFC welcomed that consultation process. Government had agreed, in the main, with the thrust of the recommendations. The recommendation to align functional budget groups was particularly important. The Commission also welcomed the recommendation to introduce spending and efficiency targets. What remained was the demonstration of an implementation plan for all these recommendations.

Discussion
Mr M Figg (DA) thanked the FFC for the good job it had done. He stated that the government had to provide the poor with grants, but a major concern was where the grant revenue would come from, since there were increasingly fewer people able to pay in. He also expressed concern that the FFC had predicted that grants would be able to rise above inflation, when that inflation figure for 2015 was as yet unknown. He also asked how downward revisions could be made without impacting on the poor. He commented that efficient spending was key to achieving better, but pointed out that many Chief Financial Officers of national, provincial and local government departments did not yet have the correct skills to achieve this. He also pointed out that a number of mergers were forecast and asked if grants would be transferable to merged municipalities.

Dr C Madlopha (ANC) asked whether the Commission could expand upon the meaning of the performance based allocation in the infrastructure programme. The grants that were taken back for under-spending were indeed affecting the poor municipalities. Until the country was able to come up with an effective intervention strategy, with capacity and skills transferred, the poor would continue to suffer, and it was urgent that capacity must be strengthened urgently. The Committee needed to get the provinces and municipalities under one roof in order to find out why there was under-spending.

Ms M Manana (ANC) requested that the FFC give more details on page 4 of the presentation, which related to the review of the budget itself.

Mr A McLaughlin (DA) stated that he was not in support of a reward for planning, which he thought would be ill-advised, and suggested that it would be better to implement incentives for proper implementation of plans.

Mr McLaughlin pointed out that the FFC seemed to be focusing still on old information and asked when it would catch up and use new data.

Ms S Shope-Sithole (ANC) commented that the government should have picked up that certain municipalities did not have the correct skills to achieve what they were supposed to achieve, and she fully agreed with the FFC's comment that government was not doing its job properly. This Committee needed to be focusing on oversight more regularly.

The Chairperson asked why there was a downward trend in the Human Settlement Grant.

Mr B Khumalo responded that the social security grants could not be viewed in isolation from the other indirect grants, such as Free Basic Electricity, water and electricity. The grant system must be viewed as a "package" of different instruments. In order to make a call, it was necessary to look at a balance of all the grants. There was a prediction of difficult times ahead for the country as a whole, and the country would need to tighten its belt on spending. The tax increase was only the start. The world was uncertain and therefore government and the FFC could only try to get as close as possible to a realistic figure for inflation.

Mr Khumalo indicated to Ms Shope-Sithole that this year was the deadline for an implementation of the skills audit in municipalities, to make sure that CFOs and others in management had the right training to do the jobs. in relation to the mergers question, he said that the grants should be absorbed by the municipalities when it came to mergers.

The performance based allocation was intended to incentivise planning. There was a phasing in period of five years, to make sure the municipalities could be capacitated. It would be important to have a conversation with the municipalities' infrastructure departments around capacity.

Mr Khumalo stressed that the FFC was looking at a holistic picture and there was nothing to suggest that the poor will be worse off. There were incentives for implementation as well, in answer to Mr McLaughlin's question, but they were much larger than the small incentives for planning. The shifts in share allocation would be fully taken up, but this needed time. The last thing that was desired was to have a double-impact so this was the reason it needed time to filter through

Dr Mabugu responded that 24.6% of revenue came from taxes. The increases in tax rates raised this to 25% of revenue for the following year (2015/2016). 25.7% was forecast for 2016/2017.The Minister of Finance had said that this growth would not come from increasing taxes again. Two areas where this could be done were either reducing expenditure growth, and/or promoting gross domestic growth at a rate higher than expected. If South Africa could get its education system sorted out, this would promote GDP growth. Eskom and labour issues were presently pinning the economy down, along with global economic downturns. If these areas were dealt with and improved, South Africa should see better GDP growth. South Africa already had a highly progressive tax system where higher wealth earners paid higher taxes, and this was good for redistribution. The expenditure side of government remained very pro-poor.

Mr Eddie Rakabe, Researcher, FFC, stated that the FFC was being cautious not to erode previous priorities. The provinces could receive additional incentives if they met certain thresholds. Slide 4 showed the share of provincial revenue decreasing from 43.9% to 42.9%. The provinces should be able to deal with the downward trend in housing spending.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, commented that the existing municipalities had received seed money to organise themselves for the mergers. In the first year, this would be directed to existing municipalities whilst the second and third years would focus on the new municipalities. She also mentioned that the required skill set for Chief Financial Officers would differ from one municipality to another; some had a small, and some a large asset base. She pleaded that the FFC should keep better oversight of the funding that was going to provinces.

The meeting was adjourned.
 

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