Financial and Fiscal Commission submission on 2016/17 Division of Revenue Bill

Standing Committee on Appropriations

23 September 2015
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

The Financial and Fiscal Commission (FFC) presented its submissions on the 2016/2017 Division of Revenue. The main theme was that the current infrastructure and infrastructure spend was presently inadequate to meet the needs of growth, poverty and inequality. Infrastructure could leverage growth and economic development but South Africa remained beset with fiscal and structural challenges remain, impeding effectiveness of this lever of infrastructure. South Africa would be facing challenges in the future, since rising interest rates were putting pressure on borrowing costs, weaker commodity prices were reducing tax, the rand depreciation was pushing costs up and electricity price shocks were expected. All of this would reduce the expenditure on infrastructure, despite the fact that there was an urgent need to get infrastructure right by providing the best value for money and managing infrastructure projects more efficiently. Other challenges included insufficient financial resources to implement municipal investment plans, and although electricity and water sanitation were potential growth areas, skills constraints in several infrastructure-linked areas hindered progress. The Presidential Infrastructure Co-ordinating Commission had been a step in the right direction towards co-ordinating infrastructure spending. FFC recommended that debt be raised, and capital conditional grants re-designed, to address the drop in capital spending since 2008. It was pointed out that capital spending on electricity, water, sanitation and maintenance would contribute to economic growth, but moving that spending to transport and housing would reduce growth. FFC recommended a reserve fund or incentive grant to assist or reward municipalities, coupled with technical assistance for building capacity, given the inadequate human and financial resources in municipalities. It suggested that local debt should be raised and capital conditional grants redesigned. Indirect spending should be used as a last resort by municipalities and provinces.  Accountability seems to a problem with a long feedback loop to Parliament and municipalities insufficiently concerned as this was not their own revenue. In education, FFC commented that the Early Childhood Development (ECD) sector remained under resourced after a long history of under investment, and suggestions were made for government upgrades to community NPO based ECD facilities, and temporary funding to finance private facilities. It was important to continue socio-economic programmes to improve living standards, income and education outcomes. ICT spending was vital but currently there was no co-ordination between departments, or public interaction.

Members raised several points in the discussion, including the effect of the depreciating rand, how to use this to attract investment, how to best incentivise municipalities, the wisdom of raising debt to fund infrastructure, the problem of overlapping mandates, the role of district municipalities and the purpose behind the BRICS contributions, and the value of the ICT spend. Members commented that municipalities should be run like a business, and they questioned the differing approaches to metros and district municipalities, and why only 9% of the total SA revenue was going to municipalities. They were insistent that overlaps and inconsistencies must be eradicated. All Members were unanimous in stressing the need to upgrade ECD and education. The Chairperson made the point that this was a diagnostic analysis and Parliament must play a strong role in monitoring spending and performance quarterly, and hold municipalities to account. Members asked how mega projects would dovetail with municipal development, and stressed the need for competent individuals to manage projects. The FFC added that it was looking at areas of lack of cohesion at national and cooperative governance level, research being done on municipalities and rural and urban development, and explained the impact of the depreciation of the rand on imports, exports and local manufacture, and how debt could be leveraged effectively. The Parliamentary Budget Office and National Treasury gave input on some of the questions.

Meeting report

2016/17 budget: Submissions by Financial and Fiscal Commission
The Chairman, introducing the presenters, noted that this meeting set the term for the national budget for 2016/17 and was vitally important in demonstrating to the public where the money comes from and where it will be going.

Prof Nico Steytler, Commissioner, Financial and Fiscal Commission, stated that the analysis by the Financial and Fiscal Commission (FFC) was drawn from the National Development Plan (NDP). The current infrastructure was regarded as inadequate to meet the needs of growth, poverty and inequality.  There was a pressing need to harness the power of infrastructure; as high returns could result if resources were transformed into assets that supported growth and development.

Dr Ramos Mabugu, Head of Research, FFC, continued that although growth predictions for the country were currently dire, it must be remembered that South Africa had huge resources that could be harnessed.  Infrastructure was currently ageing and badly maintained in South Africa. Certain fiscal and structural challenges remained, impeding effectiveness of this lever of infrastructure.

South Africa (SA) would be under pressure going forward, with rising interest rates putting pressure on borrowing costs, weaker commodity prices reducing tax, rand depreciation pushing costs up and electricity price shocks. This would reduce expenditure on infrastructure. There was now an urgent need to get infrastructure right, by providing the best value for money and managing infrastructure projects more efficiently.

He noted that there are currently insufficient financial resources to finance and implement municipal investment plans. There are still skills capacity constraints in areas of engineering, procurement management, productivity improvements and life cycle asset management. Electricity and water sanitation were areas that could spur growth.  The establishment of the Presidential Infrastructure Co-ordinating Commission(PICC) had been a step in the right direction in co-ordinating infrastructure spending.

The FFC recommendations were to raise debt and redesign capital conditional grants. The rate of growth in capital spending had dropped off since 2008. Money spent at the municipal level was important, for when capital spending took place on electricity, water, sanitation and maintenance it contributed to economic growth. Spending on roads and housing actually reduced growth.  There should be a reserve fund or incentive grant which could be used to assist or reward municipalities. Technical assistance for building capacity should be targeted.

Ms Sasha Peters, Programme Manager, FFC, stated that indirect grants were used for infrastructure development. The share of indirect to direct grants had grown to its current level of around 8.6% in 2015/2016, and it was set to grow further. There had been no evidence that indirect grants performed less adequately than direct grants. However, based on a recent study, FFC suggested that National Treasury (NT) and line departments should consider using indirect grants as a matter of last resort.  A set criterion to guide scheduling of grants needed to be taken into account, and she suggested that this should include history, non-financial performance and the time period involved.  Decentralised delivery recognised the key role of local government. There was widespread under spending within indirect grants. Key findings included the fact that there was little accountability between municipalities and their communities. As the revenues were not the municipalities' own revenues, the municipalities tended not to pay close enough attention to the performance of the grants. Municipalities were not responsible for under spending on indirect grants, and instead there was a long accountability loop through Parliament. There were inadequate human and financial resources in municipalities.

Mr Ghalieb Dawood, Programme Manager, FFC, continued with comments on the education sector. It was clear that the Early Childhood Development (ECD) sector was under resourced and had a long history of under investment. A study had found that the current ECD subsidy did not provide for infrastructure and there was no obligation to provide it from government. The budget allocations were fragmented and ad-hoc, with financing coming from various departments. The recommendations were that government should upgrade community NPO-based ECD facilities.  A temporary funding programme to finance private ECD facilities should be created. The ECD infrastructure plan should be incorporated into municipal Integrated Development Plans (IDPs). Technical services needed to be improved.

He said that the question was how South Africa could do more with less, especially in the field of education? Public sector services were often intangible, which made it hard to put a value on them. A framework for measuring public productivity should be developed to be able to assign a value. Better qualified maths and science teachers would make an impact on education. Socio-economic programmes that improved living standards and income for households should continue, as they enhanced education outcomes. Government should look at non-funding mechanisms to improve productivity in schools, such as improving governance in schools.

ICT was also vital. The NDP had committed to having 100% broadband penetration by 2020, with all social institutions being connected. R17.5 billion had been spent on this, up to the 2011/2012 financial year. However, spending was not happening in a co-ordinated fashion. E-government services should be made available to the public and citizens. The ICT implementation plan should be made public.

Mr M Figg (DA) noted that slide 4 stated that municipalities were not meeting targets, and he felt that more money may not solve the problem. In relation to slide 5, he asked why the depreciating rand had not led to a rush to invest in the country. He noted that slide 7 showed that SA’s credit rating was sliding, so raising public debt would surely be problematic rather than helpful, and he asked for comment on this. In relation to slide 15, he asked whether a standard costing technique should not be employed, rather than a historical one. He also questioned whether there should not be consideration given to a penalty for non-performing municipalities. Finally, he questioned whether there was a negative effect of trade unions on education.

Mr A McLaughlin (DA) commented that he was happy to see a decentralised approach to spending. Municipalities should be run like a business, and surely this should be put into effect. Only 9% of the total SA revenue was going to municipalities, and this was in his opinion too little and needed to be raised. He asserted that it would be vital to eradicating areas of overlap, pointing out that water and sanitation was covered by municipalities, national and provincial departments. He wondered how this could be addressed. Finally, he said that it would be essential that ECD structures were enabled to comply and that they were equipped.

Ms E Louw (EFF) queried why municipalities and provinces had not spent their budget on infrastructure. She asked how the FFC was going to make sure that grants would be transferred accurately. She asked what was meant by “under-resourced” on slide 21?

The Chairperson stated that the FFC was doing a diagnostic analysis, and it was up to the Parliamentary committees to monitor spending and performance in the departments on a quarterly basis. The trends and history must be probed. South African Local Government Association (SALGA) must be part of this meeting. Speaking to slide 20, he said that MPs must explain the division of revenue to their constituencies. They must also hold the officials in their respective municipality accountable. He said that it would be vital to harness the departments dealing with rural development, agriculture and water affairs, through intergovernmental relations.

Ms E Van Lingen (DA, Eastern Cape) asked for clarity on slide 8, and asked whether, when the FFC went to the provinces, it would interrogate the provincial infrastructure plan. She wanted to know if these plans were going to be prioritised according to the FFC guidelines, or whether they were “political promises”? She asked how the mega projects were going to coincide with municipalities' plans – for instance, how would the upcoming nuclear build affect Coega's infrastructure? She commented that a person who was to do project management would need a certificate and experience, and the entire human resource aspect must be analysed. There was no operational plan for these infrastructure builds, and so she asked how they were to be run. She noted that a new model was being run by one district municipality in the Eastern Cape, and wondered if this was something in which the FFC was involved. Speaking to social development issues, she commented that South African teachers were not being adequately looked after. She said that there were a number of layers in this debate, and asked if the FFC could consider recommending strongly that qualified people would be put into key positions.

Mr F Essack (DA, Mpumalanga) queried slide 4, and asked how proactive was the government in this respect. He wondered how necessary was the R10 billion commitment to BRICS, given SA’s fiscal space and balance sheet, and questioned how deeply South Africa wanted to go in borrowing. He noted that district municipalities were not delivering, and asked if they should really be getting the funds that they were presently receiving. In relation to ICT, he noted that R17.5 billion had been spent, and wondered where exactly the spending took place.

Ms S Shope-Sithole (ANC) commented that accountability was an issue that must be emphasised by Parliament. People would not account, unless they were made to account. Parliament needed to keep all the departments on their toes. The Parliamentary Budget Office must give a list of provinces that did not comply with co-operative governance.

Prof Steytler responded that there were four main areas to look at. There was a lack of cohesion at a national level – which came into play on issues like who actually does the ICT? There was a lack of cohesion at the cooperative governance level, and he agreed that there were overlaps. The Metros needed to know who was to do what – in terms of transport, housing and service. The FFC had not, in this presentation, specifically addressed the district municipalities, but he asserted that where there were strong municipalities, there should not be a need for district municipalities, but if there were weak municipalities, then district municipalities were required to help and share the burden. The FFC had been doing research and hoped to present a series of talks on rural development and then focus on urban development. This research would target district municipalities and look at whether the districts needed money or not. He noted that the BRICS contributions would go to a development bank. The extent to which BRICS impacted at multi-level government was to be discussed at a conference in October.

Dr Mabugu noted that the depreciating rand was a double edged sword, for it did make imports much more expensive. The overall macro-economic outlook was that the depreciation of the rand would be good for items that SA sold abroad but not for items made for the local market. This was the push in costs that was felt. A devaluation of the rand was different for that would be a specific plan to reduce the rand, by the Reserve Bank.

Dr Mabugu said that grant funding was one aspect of the overall funding. There were credible ways of accessing debt, and it may be leveraged effectively.  If SA accessed domestic debt, this could create savings compared to borrowing internationally. Behind every grant that was operational, some sort of costing had been done. The FFC approach was to use history in analysing the situation, but if it was a first time case scenario, then costing would be used. An incentive cut both ways, so could be seen as both a carrot and stick. It was meant to change behaviour.

Dr Mabugu noted that the FFC's current report was only one set of recommendations. The main issues were lack of budgeting, planning and accountability that had led to reduced infrastructure spending. There was a stagnation or reduction of borrowing in municipalities. This was hindering progress. This meant that municipalities were competing with each other for the same “pot” of funding. The FFC looked at the PICC and how it dovetailed with municipalities. He suggested that it was probably time to use “a big stick” approach where projects were being mismanaged or the people were not qualified.

Mr Dawood stated that there had been a significant backlog in spending on ECD infrastructure. The FFC had a technical report on this, accessible on its website.

Ms Peters stated that the FFC needed to go into more specifics around capacity building.

Ms Nelia Orlandi, Senior Policy Analyst, Parliamentary Budget Office, stated that year after year, no spending was reported, plans for skills were drawn, plans for interventions were developed and analysis of the spending was conducted. All of this did not seem to help municipalities to spend. The same person was often used to see to the spend of the direct portion and the indirect portion of the grant, and this should be separated.

Ms Wendy Fanoe, Chief Director, National Treasury, reported that the Medium Term Budget Policy Statement (MTBPS) would be released in October and most of the 2016 Medium Term Economic Framework would be outlined in that document. She clarified that the government would be responding to the FFC recommendations only next year. National departments needed to respond to the FFC, so that, for example, the Department of Communications would need to respond on the ITC issues. If the MPs were of the opinion that departments were working at cross purposes, she noted that MPs could call the departments in to a joint sitting. It was very easy to refer to expenditure, but she pointed out that it was possible to spend all the money allocated yet show no real impact. In relation to the balance between short-term expenditure versus long-term liabilities, sometimes it was better to spend more up front, rather than less.

Ms Fanoe noted that it had taken National Treasury around ten years to build capacity in provinces, and Treasury was trying to do the same with the metros now. It was important to reconnect stakeholders and, for example, bankers, financiers and provinces were getting together with NT to regenerate the borrowing market. Good work was being done in several areas, through the Office of the Chief Procurement Officers, including in medicines, where good contracts had managed to substantially reduce costs.

The meeting was adjourned.


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