2004-2007 Medium Term Expenditure Framework: FFC submission; FFC Amendment Bill: briefing

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Finance Standing Committee

26 May 2003
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Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
27 May 2003
2004-2007 MEDIUM TERM EXPENDITURE FRAMEWORK: FFC SUBMISSION; FINANCIAL AND FISCAL COMMISSION AMENDMENT BILL: BRIEFING

Chairperson:
Ms B Hogan (ANC) [Portfolio Committee]
Co-chairperson: Ms Q Mahlangu (ANC) [Gauteng]

Relevant documents
Financial and Fiscal Commission Presentation on 2004-7 MTEF
Financial and Fiscal Commission Submission on 2004-7 MTEF [offsite link]
Financial and Fiscal Commission Amendment Bill [B21-2003]
Financial and Fiscal Commission Submission on the Amendment Bill (Appendix)

SUMMARY
During the discussion on the FFC's MTEF presentation Members raised the following concerns: whether the FFC believes government is working towards achieving its MTEF goals, the reasons for the re-assignment of the social grants, the measures in place to establish a national statistics system, clarity on the FFC recommendations on the review of the role of the Budget Council, the accessibility of the rural communities to Early Childhood Development and Adult Basic Education and Training services and clarity on the current status of the conditional grants.

Treasury indicated that the FFC Amendment Bill deals with the transfer of powers from an organ of State in one sphere of government to another, it reduces the number of Members on the FFC and prescribes the list for the appointment of these nominees. During the discussion Members of the Committee proposed the introduction of a timeframe within which the FFC has to respond to the organ of State, the FFC expressed its concern at the possible duplication of provisions of the Bill with Section 9 of the Municipal Systems Act. The Committee also considered the inclusion of the FFC's two submissions on the Bill.

MINUTES
Presentation by Financial and Fiscal Commission (FFC)
Mr M Morobe, FFC Chairperson, dealt with Part A of the presentation (document attached). The section focused on the review of the intergovernmental fiscal relations system. The presentation focused on key issues such as the pace of providing basic services, the sustainability of the intergovernmental system, the effective participation of each sphere in intergovernmental fiscal arrangements, and the development of capacity in all spheres of government. The section also focused on the expenditure assignment, performance measurement, performance indicators, poverty targeting, norms and standards, fiscal capacity, co-operative governance, collection of data, and funding instruments.

Mr B Khumalo, FFC Manager: Fiscal Policy Analysis, presented Part B of the FFC submission. The section focused on the division of revenue for 2004/2005 with proposals applicable to national, provincial and local government. Mr Khumalo discussed financing HIV/AIDS, health conditional grants, provincial government, PES: educational component, PES: health care component, PES: social development component, and the overall PES formula.

Dr H Fast, FFC Manager: Parliamentary Office, presented the final segment of the FFC submission. This section focused on local government, particularly, funding of institutional capacity, urban and rural development nodes, differentiated approach to municipalities, and local government proposals.

Discussion
Mr B A Mnguni (ANC) [Portfolio Committee] asked if the FFC believed that government was working towards achieving the goals of the financial year and the interim period. He noted that the FFC has the ability to measure the progress and see what the Department does to address the goals.

Mr Morobe responded that the presentation explained some of the issues raised by Mr Mnguni. He explained that when the medium term budget policy statement is issued in October the FFC gets an idea of what the government seeks to achieve. The medium term budget is constructed to address the goals of the government in the financial year. The important question is how the FFC is meeting the targets - a question that the FFC is beginning to address. It is government that has to put the systems in place that will ensure that target are reached. Government has structures like the HSRC and Statistics South Africa that does some of this research. Government Departments have to give performance reports and many Departments go to Statistics South Africa with individual requests. That process seems disruptive. The setting of very clear categories will make the task of assessing progress easier. Once the budget is passed, it is in the interests of the government to meet the targets set, otherwise government should be held accountable for its shortfalls in meeting the targets. If the targets are not met, the government will pay more in the future to conduct the same work because of the general upward trend of inflation. He stated that there were no absolute answers as to the best way for government to meet its objectives, but this might be one way to approach it.

Mr K A Moloto (ANC) [Portfolio Committee] requested the reasons for the FFC to call for the reassignment of social grants to the national strategy agency. He asked if this action was caused by weaknesses in the present system that the FFC has picked up. He also asked about the impact of user fees on service delivery.

Mr Morobe answered as to the specific reasons for the FFC recommendation concerning social grants. The reason for the recommendation is that the grants have wreaked havoc with provincial budgets since 1994. The problem is that a norm is established at the national level. For instance, the level of pensions, is set at the national level, without input from local government. Since local government is under statutory obligation to pay for the pensions, provincial budgets come under pressure. Other programmes will be cut from areas in which there may be constitutional obligations. The FFC recommends that the national sphere defer the responsibility for this particular function. This should not be the case for the entire social service function, but relates to those activities that are obligated, such as pensions. He suggested that the best way to structure this would be to have a body that would consist of representatives from both provincial and national government. This would lead to a relationship between the sectors, but would not take away the national sphere's power or prerogatives.

Concerning user fees, Mr Morobe warned against a situation where the right hand gives and the left hand takes away. On the one hand, the government is trying to assist with poverty alleviation, but a system of tariffs could undermine the goal of alleviating poverty. He stated that this is a relevant concern and that our system should be managed and structured to assist the most disadvantaged citizens.

Ms R Taljaard (DA) [Portfolio Committee] asked what relationship will be established with other agencies to put in place the masterplan for data collection. This plan would have to involve a very sophisticated system that would measure development and match expenditure to that development.

The Chair asked to what extent the FFC is aware of developments within government departments, provinces and municipalities to establish a national statistics system, such as the one Statistics South Africa has been working on. These information collecting systems have to be discussed in greater detail by government.

Mr M Tarr (ANC) [Portfolio Committee] asked to what extent a dedicated unit should be established that deals exclusively with providing this data and measuring the objectives involved.

Mr Morobe responded to these questions by stating that everyone needs this type of information, and the faster they can get it the better for the speed of transactions which the modern economy requires. This is a challenge. The FFC's inquiries into the establishment of a national statistics system begins to drive thinking in that direction, without the FFC imposing itself into an area that Statistics South Africa is better placed to spearhead.

The FFC recently received some of the local government budget process documents, which indicates the beginning of a process to streamline the methods of reporting and capturing of budget information for local authorities. There is a demand for sophistication in the manner in which this is collated and compiled, but at the same time some of the systems should also not be over-engineered. The real question is how the individual is encentivised to operate optimally, so that the whole data collecting process runs properly and efficiently. It has to be ensured that even the most basic information collecting systems functions smoothly, because there are some humanpower issues that will not be solved by the introduction of sophisticated computerised data collecting systems. Thus a statistical system is needed that is coherent, consistent and which can speak to the different arrangements in the system. This will assist the intergovernmental arrangements

Ms Joan Fubbs, Chairperson of the Gauteng Province Standing Committee on Finance, stated that the functionality of the data should and could not be done by a single agency. The very fact that it is integrated information calls for a collaborative approach. If the data is not integrated or disaggregated then regardless of capacity, a quality service will not be delivered. This is the conundrum.

Ms Fubbs stated that the performance indicators make no reference to the measurement of the quality of the work delivered. There is something critical that is missing here, and which is not being measured.

Mr K Durr (ACDP) [Western Cape] asked how the inaccuracies in the Statistics South Africa report on the calculation of inflation affects the FFC's conclusions to date on the budgetary process going forward.

Mr Khumalo replied that the FFC conclusions are nor driven by the numbers it had actually utilised. The FFC began from a principled position and then looked at the numbers to make a decision. Thus the conclusions would not be affected by the inflation figures that much.

Mr Morobe added that all this calls for is for the FFC to adjust the figure, once the proper data is finalised. It clearly does have significant impact, and the FFC is now awaiting the revised figures.

Mr T Ralane (ANC) [Free State] asked whether the FFC is saying that a common increase in municipal tariffs have to be decided.

Mr Khumalo responded that the issue around norms and standards speaks to what is actually required for the provision of basic levels of service. It is basically up to the municipality itself to decide on its tariffs and their levels. It is then up to the citizens of that municipality to decide whether that tariff rate is too high compared to the service it is receiving.

Mr Ralane asked whether the norms and standards mentioned in the presentation refer to the equalisation of the salaries of rural and metropolitan managers.

Mr Khumalo replied that it is the decision of the local government. There is very little that can be done here, especially since the municipality's equitable share component of its revenue is probably below 2%.

Mr Morobe added that equity cannot be equated with equality. If people want equality, the least the FFC can do is inform them of the financial implications of their decisions. They can then either decide to take the risk outlined or change their decision.

Mr Ralane asked whether the inland and coastal transportation tariffs will also be equalised as well.

Dr G Koornhof (ANC) [Portfolio Committee] sought clarity on the FFC recommendation that the roles of the Budget Council and Budget Forum be reviewed.

Mr Morobe responded that at a Budget Council meeting as far back as 1995 the FFC argued that it would be better if the institution of the Budget Council of formalised, so that more formalised decisions could be taken that the FFC could then act upon. The result is that these two bodies have now been provided for in the Inter-Governmental Fiscal Relations Act. A close reading of that Act reveals that it gives differential treatment to the Budget Forum and the Budget Council. In 1995 local government was a weak structure, organisationally, and the South African Local Government Association (SALGA) had not yet taken root. The role played by the Budget Forum in addressing the challenges of co-ordination, integration and co-operative governance has to be reviewed, as well as its status in the system in terms of the key decisions impacting on the sector. The Budget Council does not seem to contribute to the decisions taken, and is more of "a poor cousin". SALGA itself has also raised this matter.

Ms S Nqodi (ANC) [Portfolio Committee] sought clarity on the effect of the discontinuation of the October household survey on the work of the FFC.

Mr C Van Gass, FFC Manager: Budget Analysis, replied that there is a gap in the household income statistics without the October household survey, inasmuch as the equitable share uses poverty statistics. This gap could possibly be filled by the Census figures. But any gap of this nature would be a loss.

The Chair informed Members that the Co-Chair would be taking over for the remainder of the meeting.

Mr Ralane asked whether the FFC has done a study to ascertain the accessibility of rural communities to Adult Basic Education and Training (ABET) and Early Childhood Development (ECD) services. What kinds of mechanisms can be put in place to address this?

Mr Khumalo replied that the law now requires children in Grade R to receive ECD. The same can be said for children between the ages of zero to fifteen, who are compelled to be at school for nine years. If the child is of the age at which s/he has to be at school, the his/her accessibility to the ECD and ABET services then depends on the mechanisms in place that deal with this uptake. There are Community-Based Organisations (CBO's), Non-Governmental Organisations (NGO's), the public and the independent school systems that all serve to maximise this uptake. Whether or not those facilities are there has to be considered by looking at the infrastructure and human capital in place to ensure this. The Department of Education has a ten year plan for phasing in the ECD programme, and is looking at these sorts of issues. It will thus not be solved overnight, but will take some time. The FFC has not conducted a study on this though.

There is very little information on ABET. Firstly, it is uncertain at what point and age this begins. There is also no certainty on the actual number of illiterate people that want to be literate.

Mr Ralane stated that conditional grants should be stringent, precisely because they seek to address a particular trend in terms of the national funding.

Dr Fast responded that the FFC is not saying that more conditional grants should be awarded. The trend with both provinces and municipalities has been towards an increase of the equitable share relative to conditional grants, relative to their overall allocation. The FFC proposal suggests that perhaps government needs to look carefully at conditional grants and whether or not the same conditions should be applied to all municipalities, or whether they should perhaps be relaxed in some cases or made more stringent in others.

Mr Morobe added that the important issue here is that there is a spectrum of conditions attached to any grant. These can range from the most simple to the more complex conditions. The problem which arises with the complex conditions is the capability to manage those conditions. The reporting requirements which then arise become so much more cumbersome that they begin to defeat the very purpose for which the grant was first issued. It is for this reason that Treasury has begun a process to rationalise the whole series of conditionalities, in order to structure them so that they are more accessible and user-friendly.

Dr Koornhof stated that the FFC has proposed that the awarding of conditional grants instead be handled by the central government, because there are some provinces that lack the capacity and infrastructure to process these adequately. What effect would this recommendation have on the equal division of powers between the provincial and national spheres of government?

Mr Morobe responded that he does no believe that this will have any impact on the division of powers. It basically realigns the processes of channeling the resources from the source of the power to allocate and determine. It just so happened that this power to decide resided at the centre and it was at the implementation side, ie. at the provinces, created all manner of difficulties. The aim is thus to streamline the process, and this will not affect the division of power in any way.

Dr Koornhof asked whether the FFC has already made any specific proposals on the reclassification of local government and, if so, what are these categories.

Dr Fast answered in the negative. The FFC has however asked whether there should be an overarching framework, and the response was "no". The FFC then identified certain areas where the reclassification could be applied. Further work therefore needs to be done on this.

Ms R Joemat (ANC) [Portfolio Committee] asked what mechanisms are in place for Treasury to take up the proposals put forward by the FFC. How can this Committee assist in this process?

Mr Morobe responded that this is an issue which the FFC hopes will be resolved. The advancement in the budget process with the greater refinements in the budget review exercise and the application of Annexure E of the Intergovernmental Fiscal Relations Act, goes a long to way to getting the process onto the more formal platform of budget consideration. The FFC has not attached deadlines for the realisation of its proposals, but instead has linked them to specific issues. They thus serve as tools available to the Committee when it deals with Treasury, or for any other government department. Those proposals that are not taken up immediately do not affect the FFC. It is of the view that if the proposal is viable "its time will come". These proposals are thus a resource that is available to the system.

Mr Mnguni asked what the impact of SITA has been to alleviate the problem with the lack of capacity at local government, and probably at provincial government as well.

Mr Morobe responded that SITA's impact has been minimal. It is hoped that its own administrative and management problems will be resolved soon. Its potential has yet to be realised, and it is still a work in progress.

Mr N Nene (ANC) [Portfolio Committee] sought clarification on FFC's concern with means testing, as well as on its concrete recommendation on this matter.

Mr Khumalo replied that the issue here is that means testing has an effect on the take-up rate, and it is one areas where administrative officials have an influence on the take-up rate. Thus the benefits of the means testing have to be balanced against those potential manipulations that might happen in the process. The Taylor Commission Report would probably be the best document dealing with means testing in South Africa, and it does go into some significant detail on the benefits and shortcomings of means testing. The FFC did not make any recommendations on this though.

Mr Nene sought clarity on the FFC recommendation on the funding of the nodal points.

Dr Fast responded that the FFC agrees that government can choose to channel more funds to certain areas. The question is the choice of funding mechanism. It must not be channelled through the equitable share allocation. The same amount of money can be channelled through a conditional grant or one that has almost no conditions at all, which is facilitated through the Constitution.

Ms L Mabe (ANC) [Portfolio Committee] sought clarity on the FFC's recommendations to ensure that the new rural municipalities that did not exist before 2000 have the necessary capacity and development, so that basic services can be delivered.

Dr Fast responded that the FFC is concerned that the equitable share formula ensures that fiscal capacity is adequately taken into account. At the moment poverty almost acts as a proxy of fiscal capacity, as it assumes that there are concentrations of poor people that do not have the ability to pay for services. The FFC is researching this and has indicated in its recommendations to government that fiscal capacity has to be incorporated into the local government formula. Furthermore with infrastructure allocations, backlogs are a key element of the formula to ensure the infrastructure funding flows to the poorest municipalities, which generally are allocated predominantly in the rural areas.

Ms Mabe asked whether government will not be under-budgeting on foster care grant, or even the disability grant. This is a problem because Statistics South Africa stated that they are having trouble ascertaining accurate figures of the exact cause of HIV/AIDS deaths, and more and more people are dying from HIV/AIDS.

Ms C-S Botha (DA) [Free State] stated that government is pretty sure about what it wants to deliver, but the inaccuracy of proper statistics on issues indicates that it is not certain to whom this has to be delivered. Does the FFC have specific plans to improve the data is clearly needs and, if it does have these plans, what are they? Will it be collecting this data itself, or will some other body be contracted to improve this collection method?

Mr Morobe responded to these two questions by stating that the FFC needs statistics, it is a key requirement in its operations. Yet it would not want to make the mistake of considering itself as a statistics collecting agency. The stand of the FFC is that it is interested in ensuring that the credibility of its statistics collecting agency is established. Although Statistics South Africa is responsible for compiling such statistics, such as the Census, the FFC can also intermittently conduct surveys to generate certain types of figures. Yet it is more inclined to use more official figures than to speculate, of which Statistics South Africa is the main agency. This would cause more controversy than resolve anything. Any statistical reports compiled by the FFC is also handed over to Statistics South Africa, and discussions could even be held on those. All this does not detract from the importance of having a more comprehensive national statistical system that can form the basis from which all can proceed.

Ms Fubbs asked the FFC to explain its recommendations on the borrowing requirements of the grouping incapable of raising a loan of any kind. Did the FFC explore this further?

Dr Fast replied that the second category deals with those municipalities that could get access to loan finance at favourable rates but are not, or are paying very high rates. The FFC's recommendations here from its 2002 submissions is that government should institute specific policy measures to ensure that those municipalities get access to that loan finance at favourable rates. The could include specific capacity building programmes for debt management capacity.

There is also a group of municipalities that fall into very poor management capacity and have a very weak economic base, and do not have access to loan finance. This is where the backlogs are the greatest. During 2002 the FFC submitted that the flow of infrastructure funding for conditional grants from national government must take this into account.

Ms Fubbs stated that it is because of this submission that the Gauteng legislature raised the problem in spending the full conditional grant for infrastructure in one year, the period for which it is granted. The Gauteng legislature then asked for this to be explored further.

Dr Fast responded that in the meantime this has been taken over by the new policy framework for conditional grants for infrastructure, which have been approved by Cabinet. This framework specifies that municipalities will have indicative allocations for infrastructure grants over the MTEF period. They do not thus have to spend the full amount in one year, but can decide how the funds will be apportioned. Thus Ms Fubbs' concern here has been resolved.

Mr M Makoela (ANC) [Limpopo Province] asked whether there is a link between the crowding out of social services due to lack of funds, and the provinces' inability to access the funds from the conditional grants because the conditions are so stringent.

Mr Khumalo replied that conditional grants as a share of total transfers to provinces have been declining. Thus the issue of whether there is this link is probably not the case. The issue around crowding out is based on the actual indicative allocations versus the actual expenditure outcomes.

Briefing on Financial Fiscal Commission Amendment Bill
Mr Vuyo Kahla, Treasury Chief Director: Legal Services, that the background to this Bill is the 2001 amendment to the Constitution to reduce the number of members of the FFC Commission, for both the provincial and local government representatives. The Bill also seeks to align certain provisions of the FFC with the PFMA. Treasury has considered the submission by the FFC (Appendix 1). Only the first amendment has to be deliberated on by the Committee, because the second has been cured by the current draft of the Bill.

Clause 1
This provision is a result of the decision that any organ of State that is to make the transfer of the function to another, it must request the FFC's advice on the financial implications of the assignment. Sub clause (2A)(b) states that that organ of State will then also have to indicate the extent to which is has taken account of this advice. The FFC submission proposes that Sub clause (2A)(b) include this indication "in the prescribed form". Treasury would prefer the FFC to provide advice, and the organ of State must then merely indicate what it has done with that advice before it comes into operation.

In order to cure the FFC's concern here Treasury proposes that a new Sub section 2B be inserted, which would read as follows: "a request by an organ of State that that Commission performs any of its functions must be made in the prescribed form".

The words "when appropriate" has been deleted from Section 3(5) of the Financial and Fiscal Commission Act of 1997 (the principal Act) because it allows the organ of State itself to make this determination.

Clause 2
The amendment to Section 5(1) of the principal Act merely alters the numbers of the members. The amendment to Section 5(2) sets out the process for the compilation of the list from which the persons will be elected.

Clause 3
This is a consequential amendment to the new Section 5(2) proposed in Clause 2.

Clause 4
This amendment allows the period for reporting in the principal Act to be aligned with the period of two months stipulated in the PFMA

Clause 5
This also aligns the auditing requirements in the principal Act with the PFMA.

Clause 6
This amendments the Organised Local Government Act of 1997, which deals with the process for the appointment of the members of the FFC from the local government sphere. An additional amendment to Section 5(2)(a) of the Organised Local Government Act of 1997 in the Schedule should be made. Section 5(2)(a) creates more ambiguity, and the phrase "from the nominees contemplated in Sub section 1" should be inserted after "two nominees". The same amendment has to be made to Section 5(2)(b).

Discussion
Clause 1
Mr Morobe proposed that Sub section 2A(a) read as follows:

An organ of state in one sphere of government which seeks to assign any power or function to an organ of state in another sphere of government must advise the Commission, on a prescribed form, of such a decision indicating how it has taken into account the financial implications of its decision.

This essentially forces government departments and officials to think about the financial implications of those decisions. Thus when the matter then comes before the FFC it would evaluate those decisions, rather than actually doing the work that should ordinarily be done through the Director-General and Finance Department of that office.

The Chair agreed that one would be sympathetic to the views of the FFC, as it is not its job to be doing the auditing and accounting functions of the government department. Is it within the Constitutional ambit of the FFC to receive the type of advice it is asking for?

Dr Fast stated that there could possibly be a duplication here with Section 9 of the Municipal Systems Act, because that section also deals with the transfer of functions from one organ of State to another.

The Chair requested that this matter be considered further, and proposed that Dr Fast raise this matter during this Committee's deliberations on the Municipal Finance Management Bill on Friday 30 May 2003.

Mr D Hanekom (ANC) [Portfolio Committee] suggested that a time limit be set for the FFC to respond to the organ of State, as the assignment would then have no legal effect.

The Chair requested Treasury to draft an agreement on this and to forward it to the FFC for approval. The final consensus reached must then be presented to this Committee for consideration. The Bill can then be passed at that time.

The meeting was adjourned.

Appendix 1 : FFC Submission on the Amendment Bill
RE: SUBMISSION OF THE FFC ON THE FINANCIAL AND FISCAL COMMISSION AMENDMENT BILL, 2003

As indicated in the memorandum to the Financial and Fiscal Commission Amendment Bill, 2003 (the Bill), the Financial and Fiscal Commission was consulted with regard to this Bill. The Commission's input, however, was in respect of an earlier draft of the Bill. Although the draft published for comment is in most respects the same as the earlier draft that the Commission had sight of, it is different in one important respect which we outline below.

Prescribed form for request

The Commission receives many requests from organs of state for advice. Some of these requests the Commission is obliged to respond to in that the Commission's recommendations are required by the Constitution or legislation. Other requests are not expressly envisaged in the Constitution or in legislation. This latter category of requests varies greatly in terms of the advice sought, the instruments in relation to which the advice is sought, the extent of research required, the time frames for responses etc.

The Commission may not always be able to respond to all requests and in order to facilitate how it processes and responds to requests it requires that requests by organs of state be submitted on a prescribed form.

This was contained in the earlier version of the Bill which added a subsection to the effect that requests by organs of state must be sent to the Commission on the prescribed form. Unfortunately, in the latest version of the Bill, this requirement has been linked to requests by organs of state in terms of the new subsection (2A). The effect of this is that only requests that specifically relate to the financial implications of an assignment to an organ of state in another sphere of government must be on the prescribed form.

The Commission proposes the following amendments to the Bill -

1) Amending the proposed subsection (2A) (section 3 of the Act) as follows -

"(2A)(a) An organ of state in one sphere of government which seeks to assign any power or function to an organ of state in another sphere of government must [request the Commission's advice] advise the Commission, on a prescribed form, of such a decision indicating how it has taken into account the financial implications of its decision. [on the financial implications of the assignment in question.]

2) Inserting after subsection 2A (section 3 of the Act) the following subsection -

"(2B) All requests by an organ of state made in terms of this section, must be sent to the Commission on the prescribed form".

Yours faithfully,

MURPHY MOROBE
CHAIRPERSON: THE FINANCIAL AND FISCAL COMMISSION

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