Intergovernmental Fiscal Review

NCOP Finance

05 November 2000
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Meeting Summary

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Meeting report

INTERGOVERNMENTAL FISCAL REVIEW

FINANCE SELECT COMMITTEE
6 November 2000
INTERGOVERNMENTAL FISCAL REVIEW

Documents handed out
Presentation by National Treasury - text outline only (see Appendix 1)
National Treasury's Press Release
IDASA submission

SUMMARY
The Committee were briefed on the Intergovernmental Fiscal Review by National Treasury. Idasa presented a submission on the document and Treasury responded to this.

Treasury - This year there has been a marginal decrease of the equitable share to provinces. The Deputy Minister said that this issue is on their list of priorities and it will recover down the line. The Deputy Minister also noted that they must try to strike a balance between social services spending and spending on infrastructure. They are currently reviewing the conditional grant system to enhance its effectiveness.

IDASA - In respect of provincial debt Idasa said that the Intergovernmental Fiscal Review contains no information on who the creditors of the provincial debt are, the interest rate of the debt, and the maturation structure. This lack of information undermines the credibility of the projections made. Idasa also says that no account is taken of new spending pressures on provinces. One example of such a spending pressure is expenditure related to HIV/AIDS.

MINUTES
Introduction by Deputy Minister Mpahlwa
Over the past weekend they had participated in a retreat with the World Bank and the IMF conducting diagnosis of the state of the SA economy: SA is on the right track but they need to deal with a few specific issues in a more determined way.
There is no obligation on government to publish the Intergovernmental Fiscal Review (IGFR). It is a useful document because they can see how public finance is faring, especially in terms of the provinces. The document shows the positive and the negative developments. The document does not seek to provide answers but sets out the facts. It shows important variances that exist between provinces and the different municipalities. It provides a tool to:
- analyse what is happening at provincial and local government
- to know what to focus on
- what to try to find answers to as it provides questions. For example the IGFR figures show that for the first 6 months there was literally no spending in provinces. The NCOP should ask what the reasons for this are.

This year there has been a marginal decrease of the equitable share to provinces. It will recover down the line. This is a policy choice that had to be made by government (a costly policy choice). The recovery of the provincial share is firmly on the agenda of the Treasury (it will be reflected in the Budget Policy Statement).

The IGFR is a critical tool because very important functions take place at provincial and local government. It complements the Budget Review that was tabled in February this year. It provides important information on transfers from national to provincial. It does not include allocations in terms of the Adjustments Budget. It does not include the revised allocations in the Budget Policy Statement - it does not go beyond February 2000.

An important question was how to bring about a balance between social services and infrastructure spending. Some important non-social services spending has been squeezed out.

In respect of the provincial budget on education there has been a reduction of the percentage of this which goes to salaries. They project a further reduction of this.
Conditional grants are dominant. Most of the conditional grants went to Health.
They are currently reviewing the conditional grant system to enhance its effectiveness.

The improvement in financial management opens the scope for spending on infrastructure.

The IGFR deals with important trends at local government level. There are many signs of problems but there are also many signs of progress. The ten biggest municipalities account for 65% of municipal budgets. There has been a range of reforms to improve financial management and the Municipal Finance Management Bill is intended to improve financial management at municipal level.

Provinces can now only raise 4% of their revenue. 96% comes from the equitable grant. Local government can raise more than 90% of its own revenue. There are many variances across different municipalities on what is raised.

The equitable share is not the only reserves to local government. There is a range of other allocations. The actual share which goes to local government is much bigger than what the equitable share shows. There has been a decrease in the equitable share that larger municipalities receive.

The broader process seeks to improve the system of transfers to local government by looking at the principles that should underpin such transfers. These issues should be contained in the IGFR. The document is important in evolving the intergovernmental system.

Briefing on Intergovernmental Fiscal Review
Mr Momoniat (Chief Director of Intergovernmental Fiscal Relations) presented. [See Appendix 1 for presentation]

Provincial trends - provinces overspent in the first few years of SA's democracy. Then they had to catch up. Its share has now decreased. They have run a surplus. This is not unspent money, it is used to pay off debt.

Provincial budget trends - in the non-social services sector, non-personnel spending has been squeezed out. Some capital expenditure has also been squeezed out.

Summary of provincial trends - the deficit rose in 1998 to R5.4 billion. It begins to increase over inflation in coming years. Social services grew in the last few years. Capital expenditure went down.

Provincial debt - provinces underestimated the level of debt. The debt is higher than initially estimated by provinces. Many provinces do not classify debt in a uniform way, for example not paying creditors is one type of debt. It is therefore hard for Treasury to discover exactly what the debt is for unless Departments report to Treasury what is going on. Provinces also work on a cash-based system so the debt is not reflected in their overdraft. This makes capturing information on it a difficult exercise.

Mr Momoniat went through the spending trends for the Education, Health, and Welfare sectors. He noted that the biggest challenge in the health sector was restructuring. Hospital growth was low and restructuring is slow. HIV/AIDS is a big spending pressure on hospitals. The budgets to hospitals are large but there is poor management at hospitals.

Local government transfers - many have been transfers in kind. Therefore they are not on the municipal budget. This means that the AG does not audit it. Treasury wants a system where national and provincial departments make a 3 year allocation. They must do more preparation in transferring to municipal government.

Poverty alleviation - (the MTBPS impact)
When preparing the 2001 MTEF they get a sense of trends. If a department is not spending this year then it does not make sense to give them the same amount of money next year. When making allocations they must take into account pressures such as HIV and child support grant. The other question which then comes up is whether the provinces will actually use the money to budget for these things.

Discussion
Mr Suka (ANC) asked if the municipalities in terms of the new demarcation process will have to face the problem of the old debt. He also asked how the Treasury was addressing the local government data problem with a view to avoiding overfunding or underfunding.

The Deputy Minister replied that the amalgamation at local government level will have costs attached to it. Therefore they are financially supporting it in a way. They are bringing together local authorities with different revenue bases. They want to ensure that the new consolidated local authorities are sustainable. They also want to ensure greater capacity to provide services. They will have to face the debt because the debt cannot be wished away in the new environment.

On the local government data, he said that it is difficult to get information from 843 local authorities. The fact that there is not a common system across all of them makes it more difficult. If they can standardise then this will help. Improving how budgets are formulated is an ongoing process.

Mr Kolweni (ANC) asked about social service delivery. Will the Department of Finance intervene in the payment of pensions? He commented that the shortage of personnel in clinics has never been improved and asked for a response on this.

Reply: Treasury cannot intervene with social services payments in the direct sense. The Welfare Grant is an important poverty alleviation programme. In the South African context, with its massive poverty, this instrument should enjoy priority. At the very least it should be able to be dispensed. A problem is that the Welfare system does not have its own infrastructure. In the past they depended on the Justice sector to dispense the grant. This needs to be addressed. Welfare must have its own infrastructure. In a study they conducted it was found that grants to women improve the nutritional status of children while grants that go to men do not.

Personnel in clinics had been affected by the move to the primary health care system. A problem is that nurses do not want to work in rural areas.

Mr Marais (ANC) commented that the IGFR did not reflect the impact of spending trends. He noted also that it was only recently discovered that the Free State was the second poorest province in the country. He asked what was being done to make the document more reflective. He added that provincial governments do not collect amounts that are owed to them and national just keeps pumping money to them. He asked what was being done about this.

Reply: The Review looks at where government spending really goes. 60% of non-interest spending goes to social services. The question is whether poor people are really benefiting. There was a study that looked at this. It looked at housing, health, education and welfare. This was only a preliminary study and there needs to be more of this. The study revealed that housing spending is the most redistributive. The results are clear, this program benefits. It showed that spending in education is not as redistributive as one may believe. It also raises the issue of outcomes. The difference between output and outcomes is big. Output should lead to outcomes but this is not always the case. Before the 1996 census the last full census was conducted in 1969. The other census left out the homelands. Thus the 1996 census showed the true picture of SA. Therefore they have only now discovered that the Free State is the second poorest. They still have to deal with this.

- On debt collection, they must continue to strive to collect the debt that is due. Some of the debts are irrecoverable. Local authorities and provinces should not be punished because they cannot collect their debts. Mr Momoniat added that they do not reward non-fulfillment of responsibilities. The municipal debts have shifted to the bigger local authorities. The transitional fund will deal with some of the problems.
The provincial revenue is not like the municipal revenue. They do not collect electricity, water, and so forth. Most of their revenue comes from motor vehicle licences. Many cars however are not registered. They must capture all the cars because car licences make up a big chunk of provincial revenue. Provinces collect a smaller revenue from health. The design of the collection service is poor. For example if hospitals feel that they cannot retain a portion of the hospital fees they collect, then they simply will not collect. They must feel that they have a stake in it.
Some debt is irrecoverable but they need to know that there is an effort made to collect them. If a province does not collect then it risks running a deficit.

Mr Marais said that some of the debt is historical (inherited debt). He asked if there was a way to separate the two types of debt in the IGFR so that it was clear which debt the province inherited and which debt they created through their own management. He asked for a comment on the NCOP role in the way the fuel price increases have affected provinces.

Reply: Historical debt relates to local authorities more than to the provinces. There was initially a declaration to write off debt to a particular point. Even so they continued not to pay. Therefore strictly speaking the debt is not historical.
On the resilience of local economies, local authorities most affected by things like retrenchments are those least likely to be able to absorb it. The Budget Policy Statement recognises that the trend in oil prices will impact on provinces like the Free State (especially in the farming sector). Treasury could consider reinstating the diesel rebate but there must be a proper mechanism in place to prevent abuse. Various departments look at how best to do this. It is on the cards.

A committee member asked how conditional grants are accounted for.

Mr Momoniat replied that there is a problem with grants not being reflected in the municipal budgets. The municipality already has a budget. They are told in that financial year that they are getting extra money. The Auditor General does not audit this amount. Who gets audited for the actual spending? These are governance issues that they need to sort out. He continued that conditional grants are an opaque area. They introduce uncertainty into the budget. Municipalities do not have a proper adjustments process. There is concern as to whether there is control over all the accounts the municipalities open. National must also ensure that it go into the proper accounts of the municipalities. It is preferable to have an up-front three year allocation. This introduces certainty and better planning on how the grant is spent.

In response to other questions by members:
- The Deputy Minister said that there is an accounting problem in respect of local government transfers. Any organisation no matter how small it is needs to put aside money for audit fees. If there are outstanding fees to the Auditor-General and National pays it, then they will be setting a dangerous precedent. Treasury suggests that the AG should try to recover these amounts. An amount was made available but they brought it down in the Adjustments Budget. The local authorities and the Departments must pay.
- Part of South Africa's legacy is that it has a weak tax base. It must be widened. The narrowness of the tax base is exacerbated by the weak revenue collection. They must develop a culture where people pay taxes that are due and pay for the services they receive.

IDASA submission on the provincial aspect of the IGFR
The Treasury has basically said that provincial spending has stabilised and that it will remain stable over the medium term. Social services spending has also stabilised.

Treasury is not responsible for what the Departments do. They have told them not to overspend and to pay off their debts. Idasa's concern however is that new spending pressures are not reflected. This could result in important provincial functions being unfunded.

New spending pressures
Education - provincial education budgets are broadly stable. Teachers need to be trained and the National Department of Education will do some training. However if teachers are trained then their salaries must be increased. Where will this money come from?

Health - there is no clear trend in the growth of health budgets. There is 1% growth in real terms. What about the impact of HIV/AIDS on primary health care? The BCEA will also have new personnel implications.

Welfare - this is an area of great concern. Provincial budgets have been decreased by 7% in real terms while unemployment increased. Only 27% of children who are eligible for the child support grant have applied for it. One third of people entitled to receive a disability grant receive it. What happens if the other people who are entitled to get the grants want to claim it? Where will the money come from?
There will also be a greater demand which will come with HIV fatalities. The projected 7% decline in the Welfare Budget is not realistic.

Equity between provinces
In Education the poorest provinces are falling behind, they are not catching up. In health there is a similar pattern. The gap between the ''haves'' and the ''have nots'' is increasing. In Welfare there is a back-log in the take-up rate of the Child Support Grant.

IDASA's concern is that there are norms and standards in Education and Health yet things are not getting better. Are these monies going to be redistributed? Where will they go?

Provincial Debt Levels
In 1999/2000 provinces owed R3.5 billion. Treasury gave provinces R1.4 billion. The debt remaining in the provinces is R2.1 billion. The report contains no information on who the creditors are, who the provinces are, the interest rate of the debt, and the maturation structure. The lack of information undermines the credibility of the projections done.

Discussion
Mr Marais noted that sometimes a whole family depends on an old age pension. If the pensioner dies and the income falls away then what happens to that family? He said that they should identify how many families there are that depend on the grant in this way.

Mr Van Zyl replied that Black Sash does work on this. The ratio that he is aware of is that 3.5 people in addition to the pensioner are dependant on the grant. He suggested that the member contact the Black Sash to find out more about this.

Mr Suka asked if IDASA made the distinction between historical debt and current debt. He also asked what caused the provinces to fall behind in spending.

Mr Van Zyl said that most debt is post 1996. Most differences between rich and poor provinces is the result of per learner salary spending. Rich provinces spend more on per learner personnel spending expenditure. On the one hand it is good to give the learner a more qualified teacher but on the other hand it costs more. It is a real problem.

Treasury's response to IDASA's presentation
The Deputy Minister said that IDASA is right to identify the issue of new spending pressures. The Treasury tries to do this in the Budget Policy Statement. Chapter 5 of the BPS deals with new social spending pressures. The social services sector is identified as an important area. Over the past 4 - 5 years social services spending has grown. It is an important area of focus. It is one of the medium term priorities. Over the medium term there will be real growth in the allocations to the social sector. The question is how to allocate the money, straight to the provinces or through national. Capital spending must be defined or it could be anything. Because social services has grown other areas must be squeezed out. They need to realign so that more may be allocated to the economic sphere. There have been pressures on the economy such as restructuring the state-owned assets. New growth in other sectors puts pressure on the social sector.

Mr Momoniat on the provincial debt information: Provinces cash manage. Because they work on a cash basis system they do not record the information. Therefore this information was not available for publication. If for example the Education department has a small creditor that it does not pay, then it is difficult to get this information. They are trying hard to get the information.

He said that the surplus last year was a surprise. In some instances it may be because provinces failed to spend. There is a capacity problem. Why is the surplus so large? What is happening in the provinces? They must monitor this. The Public Finance Management Act now sets out standards.

The meeting was adjourned.

Appendix 1:

INTERGOVERNMENTAL FISCAL REVIEW 2000

Provincial Information
· Intergovernmental Review
- Provincial Budgets (February 2000)
- 1999/00 Appropriation Accounts (July 2000)
· Adjustments Budget
- additional allocations for 2000/01
· Medium Term Budget Policy Statement
- additional allocations over baseline (2000 MTEF)
· 2000 Budget Out-turn
- section 32 quarterly reports

The Review
· Review of intergovernmental fiscal trends
· Supports budget and policy processes
· First issue in 1999 focused on provinces
· 2000 also deals with local government
· Data improved, but local govt data weak
· Provincial data based on 2000 MTEF
· 7 chapters and 5 annexures

Chapters
· Provinces
1. Budgets
2. Expenditure
3.Transfers
4.Own revenue
· Local government
5.Overview
6.Budgets
7.Transfers
· Annexures A to D
- C: Provincial data
- D: Local govt budgets & RSC info


Provincial Trends
· Flat growth in expenditure 1996/97 to 1999/00
- R89.5 bn in 1996/97
- R107.9 bn in 2000/01
- 3.8% ave annual nominal growth (CPI 6.4%)
· Decline in share of national revenue
- 58.3% (98/99) to 56,4% (2001/02)
· Stabilisation of budgets
- R5,5bn deficit (97/98) to R549m surplus(98/99)
- projected R3bn surplus in 99/00

Provincial budget trends
· Personnel expenditure
- increase from 54,7% in 96/97 to 59% in 98/99
- stabilised to 57,7% in 2000/01
- Highest in NP 63%, lowest in NC 51%
· Social sectors take 83,2%
· Squeezing out
- capital expenditure, textbooks, drugs
- non-personnel spending non-social services
· Capital (inc housing) share 7,4% in 2000/01

Summary of Provincial Spending Trends

R million

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

Total expenditure

89,488

96,021

96,145

100,223

107,920

114,094

119,916

Deficit

-2,994

-5,470

549

3,038

1,298

991

678

% change in expenditure

7,3

0,1

4,2

7,7

5,7

5,1

CPI change (%)

8,1

7,5

7,7

4.0

5,5

5,2

4,7

% Personnel

54,7

56,2

59,0

58,7

57,7

57,5

57,8

% Social services

81,7

81,8

83,2

83,4

83,4

83,0

83,0

% Capital expenditure

7,3

8,7

7,2

6,7

7,4

7,9

7,3


Provincial debt
· Higher than initial estimated by provinces
- Lack of uniform classification
- Cash-based system
· Surpluses of R1.3 bn in 2000/01
- R991 mil and R678 mil in 2001/01 and 2002/03
· Reserve R470 mil, 895 mil & R1 bn
- cushion against unanticipated expenditure
- infrastructure spending not yet allocated

Education
· 40.2 % provincial spending in 2000/01 (R43.2 bn)
- Varies between provinces (Table 2.2)
- N Province (45.6%), E Cape, Mpumalanga above average
- Gauteng (37.6%), W Cape (35.7%) and N Cape below
· Expenditure grew in real terms since 1995/96
· Over MTEF period to 2002/03
- Expenditure is projected to grow by 6,4% per annum
- Real growth in FS, Gt, KZN, NP, EC
- Real declines in remaining four provinces
· Personnel declines 91% (99/0) to 88% (02/03)
- 356 000 educators & 64 000 non-educators
- Average employee WC R100 979 vs EC R87 152
- National av R91 546
· Per learner costs vary
- NC (R4717), Gauteng R4 355 vs KZN R2 943
- L:E ratio NC 30.8 to WC 37.0 (av 34.6)
- High in NC, Gauteng, WC, low in KZN, Mpum, NP
· Capital recovers 1,1% in 99/00 to 1,9% in 02/03
· Main spending pressures are Early Childhood Development, school building and ABET

Health
· 24.3% provincial spending in 2000/01(R26 bn)
- Varies by province (two types) (Table 2.2)
- Academic hospitals: Gauteng (33.7%) , W Cape (29.8%), KZN (27%), FS
- Provinces with no academic hosp:16.9% (NC) to 19.2% (EC)
· Expenditure grew by 5,6% in 1999/00
· Over MTEF period to 2002/03
- Expenditure is projected to grow by 6,1% per annum
- Real growth in FS, Gt, KZN, NW
- Real declines in remaining five provinces
· Personnel declines 63% in 99/00 to 62% in 02/03
· Capital increases 3,6% in 99/00 to 6,7% in 02/03
· District health growing 39.1% (98/99) to 41.6% in 2001/02
· Lower growth in hospitals (1.1% & 1.9% MTEF)
· R700 mil budgets (CH Bara) and Jhb Gen hosp
· Slow or no rationalisation in tertiary services
· Main pressures are HIV/Aids, hospital mgmt and personnel pressures from rank and leg promotions

Welfare
· 18.9% provincial spending in 2000/01 (R20.3 bn)
- Varies between 25.3% in NC to 14.5% in Gauteng
· 3.1 million beneficiaries in March 2000 (2.9 mil 1999)
- 1.9 million old-age and 611 000 disabled
- 70% of old receive grants (55% in Gt and WC)
- High coverage disability (WC & NC), low FS, Mp, NP, NC
· Child support targets 3 mil children by 2003/04 (R3.6 bn)
- Budgeted figures underestimate actual take-up
· Social grants 85.9% in 2000/01(88.3% in 98/99)
- EC, KZN, NP over 90% of welfare on grants
- WC (83%) and Gauteng (80%)
· Expenditure grew by 4,9% in 1999/00
· from 88% in 99/00 to 85% in 02/03
· Welfare services varies from Gt (14.5%) to NC (25.3%)
- National average 18.9%
· Over MTEF period to 2002/03
- Expenditure is projected to grow by 3,7% per annum
- Real growth in Gt and Mp
- Real declines in remaining seven provinces
· Main pressures are inflation-related grant increases, take-up of the child support grant and welfare services

Social sector
· R89.6 bn in 2000/01
· 83.4% in 2000/01
· Varies from 77.7% in NW and Mpum
· To 85.7% in Gauteng and 85.4% in WC
· Expenditure grew by 4,9% in 1999/00

Capital (inc housing)
· 7,4% share of provincial spending in 2000/01
· R7.9 bn in 2000/01(Table 2.17)
- R2.1 bn in Gauteng
- R1.5 bn KZN, R1.3 bn EC & R1 bn NW
- includes R3 bn for housing
- excludes flood damage of R895 million
· Lack of uniformity
- Inclusion of maintenance (operating expend)

Capital Spending
· Low base 1999/00
- Infrastructure spending declined by 2,9% in 1999/00
- Gauteng built half the classrooms built since 1994
- N Province still sits with 15000 classrooom backlog
· Over MTEF period to 2002/03
- Expenditure is projected to grow 9,2% per annum
- Real growth in provinces except Mp, WC and NC
· Main spending pressures:
- Backlogs in maintenance
- Provincial and rural roads
- School buildings and hospital rehabilitation

Conditional Grants (Provinces)
· R13,4 b in 2000/01
· Problems with some grants
- Micro-control approach
- Poor planning (eg capital grants)
- Too many small grants
· Non transfers by national depts
- R547 m in 1998/99, R447 m in 1999/00
· Review of health grants

Provincial Revenue
· Decline in share of provincial budget
- from 4,6% or R4 bn 96/97
- to 3,3% or R3,6 bn in 2001/02
· Motor car licence fees, hospitals, gambling
· Poor management of revenue
· Irregular review of fees in some provinces
- motor vehicle licences

Local Government Trends
· Budgets totaled R57,4bn for 99/00
· 81% goes to operating budgets
· 92% average own revenue
· 50% of revenue from trading services
· 16% of revenue from property rates
· Salaries take up 31% of budgets
· 10 largest munis total 65% of expenditure

Local Government Transfers
· From 4,1bn (95/96) to R7,8bn (2002/03)
· Equitable share from R1,47bn in 95/96 to R3,33bn in 2002/03
· Infrastructure transfers from R771 million (95/96) to R2,2bn in 2002/03
· Current transfers from R1,8bn (95/96) to R7,8bn in 2002/03

Poverty-Alleviation
· Social grants R18,2 billion in 2000/01
· Housing grant (R3 bn)
· Child nutrition programme (R550 million)
· Local government equitable share (R1,9 bn)
· Shift in expenditure
- health (primary care)
- education
- municipal infrastructure, water etc

Updating IGF Review
· Intergovernmental Review 2000
- February 2000 budgets
· Excludes additional 2000 Adjustments allocations
· R2.373 billion (R108.4 bn plus own rev) for prov
· R100 million for local govt
· Excludes 2000 MTBPS allocations
· R4.1 bn in 2001/02 and R7.5 bn in 2002/03 for prov
· R469 mil in 2001/02 and R905 million in 2002/02

Provincial Budget Info 30 Oct
· Past performance
- Intergovernmental Review
- Revised 1999/00
· 2000/01 out-turn projections
- Section 32 quarterly reports
· Medium Term Budget Policy Statement
- additional allocations over baseline (2000 MTEF)
· 1 Nov to Budget Day
- allocations per dept (per programme)
- take into account pressures identified

Possible MTBPS impact
· Increase in share for provinces
· 2001/02 increase provinces:56.5% to 57.0%
· 2001/02 increase for LG to 2.2%
· Provincial share rises from 56.5% to 57.3% in 2003/04 in new MTEF
· Local Govt rises 2.2% to 2.5%
· Upward revisions for social sector 2000
· Additional allocations for infrastructure
· Poverty Relief

National Transfers to Local Government

R million

2001/02

2002/03

2003/04

Equitable share: formula

2 201

2 570

3 109

R293 personnel*

463

463

463

LG Support Grant

160

220

230

Restructuring Grant

350

450

465

Financial Mgt Capacity

60

120

125

Transition Grant

250

200

0

SALGA Allocation

15

15

15

Land Development Obj.

45

47

49

CMIP

994

1 159

1 407

Grand Total

4 538

5 245

5 863


Local Govt:MTBPS allocations
· Increase in equitable share
- R204 mil and R440 mil increase in baseline
- Targetted at households under R800 per month
- R86 worth of services per poor household
· Transition grant
- R250 mil and R200 mil

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