Intergovernmental Fiscal Review

Meeting report

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.

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