Division of Revenue: Financial and Fiscal Commission 2019-20 submission

Standing Committee on Appropriations

09 October 2018
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Committee received a briefing from the Financial and Fiscal Commission (FFC) on the 2019/18 Division of Revenue.

The briefing focused on the re-engineering of the Intergovernmental Fiscal Relations System (IGFR); recentralisation; provincial fiscal adjustments mechanisms in times of protracted fiscal constraints, using the health sector as an example; the incentive effects of intergovernmental grants, using evidence from municipalities; assessing the efficiency of key provincial infrastructure programmes, using the education, health and public transport departments as examples; and assessing the effectiveness of intergovernmental fiscal relations instruments in addressing water challenges. 

The FFC indicated that carrying on with “business as usual” in terms of government policies and interventions would fail to meet the poverty and inequality reduction targets set for 2030. They said that more than ever before, the focus should be on speeding up economic growth and fighting poverty and unequal access to opportunities, without further compromising public finances that were severely constrained. The current gross domestic product (GDP) growth of 2.0% must be accelerated to 4.5% between 2015 and 2030 to achieve the sustainable development goals (SDGs) on poverty and hunger. To meet the economic growth target, an increase in domestic and private investment of 5.7% on average annually was required.

With regard to recentralisation, the FFC commented that there had been a change in the way the government had broadly responded to fiscal stress, when considering the period after the 2007/08 global financial crisis relative to the current outlook for the 2018 MTEF. National government did not necessarily perform better at service delivery compared to sub-national governments, thereby questioning the rationale behind recentralisation, and a blanket approach had been shown to be not ideal.

The FFC recommended that:

  • Government should not automatically resort to increasing the role of national government, since historical performance data did not generally show support for this leading to improved performance; considering the current constrained economic environment.
  • To improve service delivery and the attainment of specific priority outcomes, control measures other than the implementation of earmarked conditional grant funding must be developed and strengthened.
  • When recentralising a function was deemed necessary, a differentiated approach must be adopted. Ideally, government should focus on where the weaknesses within performance lay, instead of applying a blanket approach which may negatively affect good performers.

The FFC made various other recommendations to the issues presented, and concluded that the central message that underlaid the various recommendations made was that in the context of the country’s intergovernmental fiscal system, three key issues had to be faced:

  • First, there was an urgent need to properly understand the country’s economic challenges and to address them specifically and directly;
  • Second was the need to establish a balanced fiscal position that could be sustained over the long term; and
  • Third, the efficiency of all government activity must be sharpened, so that citizens received the best possible value for money from the taxes they paid.

Committee Members agreed that the blanket approach did not work, but wanted more clarity on the concept of recentralisation. They were concerned about the revenue under-collection, and said that the problem involved inefficiency and poor tax collection. Citizens could not be blamed for the inefficiencies and should not be taxed more at the municipal level due to inefficiencies they had not created. Members suggested solutions to the current inefficiencies and accountability matters, and emphasised the need for infrastructure investment in order for inequality and poverty to be addressed.

The FFC said that the impact of their recommendations could be assessed only by Parliament, and if their recommendations were not considered, then there was nothing that they could do. They were the only constitutional body with the mandate of advising Parliament, so the Committee had to support the consideration of their recommendations.

Meeting report

Chairperson’s opening remarks

The Chairperson said that the objective of the meeting was to receive and discuss the submission by the Financial and Fiscal Commission (FFC) for the 2019/20 Division of Revenue. This was a requirement in terms of section 4(4) of the Money Bills Act, and therefore it was a compliance issue. The meeting gives them the space to be innovative and proactive about how they deal with issues that were provided for in Chapter 13 of the Constitution, equitable share and the allocations of revenues between the three spheres of government. As they approach the 2019/20 financial year, how do they ensure that they adopt a Division of Revenue Bill, which carefully responds to the constrained fiscal environment? As they walk this tight rope, how do they make sure that they do not lose sight of the goals they set themselves in the National Development Plan (NDP)? As they grapple with these complex, but equally pertinent questions, Members should listen carefully and constructively engage the FFC on its submission for the 2019/20 Division of Revenue.

Financial and Fiscal Commission briefing

FFC Overview

Professor Daniel Plaatjies, Chairperson: FFC, said that the theme for the Division of Revenue in the 2019/20 year was re-engineering the intergovernmental fiscal relations (IGFR) system in a fiscally constrained environment for national development. The focus of the submission was to give a review of the effectiveness and performance of the current IGFR system and make recommendations to re-engineer fiscal instruments to address challenges to achieving NDP objectives.

He reminded the Members of three previous submissions, which were the infrastructure and economic growth; two years ago, rural development; and urban development. The reason he was raising the previous three submissions was because it was becoming more and more of a critical nature that, it did not matter how they looked at the votes, or the appropriation of the votes, if they did not invest in economic and social infrastructure then they could kiss economic growth and the development of the country goodbye. Those investments were the ones that incentivised domestic and foreign investments, while on the other hand helped to contribute to the human development index of the country. The third thing was that it helped with employment.

What the FFC would like the Committee to do, which was something that was coming up in every province and in every committee, was to act if they did not see infrastructure investment in the budget votes of departments, nationally and even in the provinces as a whole, as employment would not be created. They were basically just carrying on in the same vein, maintaining the status quo. As a result, the poor would remain poor, because the budgets merely helped people to remain living in muck. The roles of public finance and spending taxpayers’ money were multiple, but were critical when it came to a country like South Africa where the Gini Coefficient was 68% to 70%, showing the deep levels of inequality and poverty. Poverty was manmade, because there were historical policies that had created poverty for black people in general. That stage had been passed now, so this Committee needed to see how the appropriations actually deliver on the democratic dividend.

The FFC and the general public of the country were concerned because they do not see the democratic dividend. The poor remain poor -- in fact, the levels of poverty were going deeper. There were people who were experiencing shock in their households. For example, the husband dies and the family might be living in a middle class area, the wife had never worked and was on a social grant. There were no changes in the rates that those people were paying, or water charges, and they do not see the democratic dividend being delivered to them. This was because the social policies compel people to be poor. The moment someone sits in a house and they get a social grant, and the house was built out of years of savings, then it was said that those people could not get social grants -- they could not receive social benefits or basic services. In reality, there was a huge economic shock to those households because there was no income coming in, and it happened across the country.

The Committee needed to be able to see how the appropriations brought by the departments actually addressed the issues of poverty. It was not about maintaining the salary levels. In fact, studies had shown that the only people who were not going to suffer and not be victims of the economic implications for the next 18 months of the slow growth were civil servants. Some of them were sitting in the room, and some would come to present to the FFC. The people that were going to suffer the most were those that worked outside of the public service, and also those who were struggling to make ends meet. The Committee needed to think differently about how they used the appropriation process of budgets and the recommendations they have given over time. Provinces were asking the FFC what the impacts of their recommendations were. One of the committees had asked what the impact of their recommendations was, and he had replied that the FFC submitted them to public servants, and they were supposed to check what the impact was. They should check whether people were actually looking at their recommendations.

The Committee had departments appearing before them, and the FFC would love to have a conversation with the Chairperson to point out that certain of them had not responded to their recommendations -- they just ignore them -- but they realise that the task in front of the Committee and other committees was huge. The FFC was available to tell them, in no uncertain terms, which departments had never responded to the recommendations made by the FFC over the period. The same could be done with the provinces, so that the Members, as public representatives, were better equipped with information from the FFC’s perspective in order to engage on the issues.

The whole idea of re-engineering the IGFR system was essentially to show the Committee how the system was constrained to be able to deliver on the NDP objectives. They either believed in the NDP, or they do not believe in it. However, one could not have a situation where they talk about the Reconstruction and Development Programme (RDP), the Accelerated Shared Growth Initiative for SA (ASGISA), the New Partnership for Africa’s Development (NEPAD), and then eventually they talk about the NDP. They needed to focus exactly on what things were needed to obligate departments to deliver on. This was because departments would come and tell the Committee rosy stories about what they were doing, and the Minister would talk about how the NDP was going to work and what they were going to do. However, in reality, their budgets, their votes, their policy and the legislation introduced to Parliament did not support that. There was no follow-through on the process, and it was quite critical to know that.

He gave the outline of the submission (refer to document), and said that in terms of the water situation, they were in trouble with regards to the municipalities -- not the metros, but the other 240. They did not debate whether there was a water crisis or not --they just knew that SA was an extremely water-poor country.

Re-engineering the Intergovernmental Relations Framework (IGFR)

Dr Kay Brown, Chief Executive Officer (CEO): FFC, led the briefing. She said the report makes a case for re-engineering the IGFR system. It does this by looking at the past economic growth and by doing a forecast to project if they continue with the current economic trends, showing where that would get them. The conclusion was that given the fiscal constraints that were built into the economy as it stands, they would place a limitation in terms of the policy development of the country, addressing particularly poverty and inequality and the equitable sharing within that. Essentially, using that econometric model, they look and try to project the level of growth that would be needed in order to make a structural shift, focused particularly on aggregate consumption expenditure and, when there was an increase in that, what the distributive effects would be on different sectors in the community, and how it would impact on poverty and hunger more specifically.

Looking at the Sustainable Development Goals (SDGs), which were to halve poverty, this meant reducing it from 55% to about 27%, and to eliminate hunger which was currently set at about 25% with regard to the food poverty line.

Since the 2008/09 global economic and financial crisis, South Africa had had slow growth. Initially in 2009, with what was now called the 2009 great recession, there had been a debate as to whether it was sort of a temporary state. However, it was now known that it was a structural break in the economy in terms of the growth and the growth patterns. Subsequent to that, particularly after 2013, the fiscal framework had taken a very visible knock and there was a narrowing fiscal space, to the extent that it was now a negative fiscal space. If no interventions were made, growth performance and projections would be very similar. South Africa was not doing very well compared to the rest of the world, the emerging markets or even sub-Saharan Africa. For example in 2017, there were 201 000 job entrants and the country had managed to absorb only 102 000. If this level of unemployment continued, poverty and inequality could not be addressed.

What was important from a budget point of view, was the budget deficit -- the difference between spending and revenue taken. In SA, there was a higher level of expenditure than revenue each year. The key thing was to try and reduce the budget deficit. Currently, the budget deficit grows annually, and a point had to be reached where the deficit reduces and ultimately reverses. In the budgets that they had seen in the recent past, the FFC had seen that in each of those projections, the date at which the budget deficit would eventually start getting smaller was being pushed to the outer years. What that meant was that they were increasingly funding interest payments. In fact, in the current financial year, the cost of servicing debt was estimated at R170 billion, which was extremely large in relation to departmental budgets.

Fiscally speaking, SA was in a conundrum. There was revenue under-collection -- the revenue under-collection last year was R36 billion. There was a narrowing tax base, with an overextending government structure in terms of departments having increased priorities and an increasing number of departments, yet there were also budget cuts. These cuts were not quite as much as the revenue under-collection, but that was not necessarily good news because that meant it added to the budget deficit. Therefore, the key message was that “business as usual” was not going to work in the foreseeable future, and that government needed to address its policies and interventions if it was to really tackle poverty and inequality. The focus had to be on making a structural change in fighting poverty and inequality whilst being mindful of the fragile fiscal framework, so that needed to be done in a way that was growth and development engendering, but also was not a threat to the fiscus.

What was concerning were the cuts that had taken place in government spending in general, but particularly as they pertained to infrastructure. From a technical point of view, there had been under-spending on infrastructure budgets, so it had seemed to be a good candidate if they needed to be cut, given that spending had not taken place and also that it was the kind of spending that could potentially be rescheduled. On the other hand, however, it was critical that there was infrastructure spending for employment and for growth going forward. More importantly, in terms of consumption spending, the numbers in the econometric model state that the consumption spending needs to increase by about 2.5% per year, and the distributive facts of that need to be assisted by about a 10% increase in social grants. If that was done, the predictions were that they would be able to impact the rural provinces particularly, and that there also needed to be a focus on skills development, or hiring skilled employment. There would have to be some sort of intervention in that regard. That was the rationale for re-engineering generally, from a macro point of view.

Mr Chen Tseng, Research Specialist: FFC, said that against the backdrop of a protracted, decelerated economic growth, a narrowing of the fiscal space and a weakened governance, the IMF had alarmingly concluded in its 2018 Article 4 consultation that “some of South Africa’s economic and social achievements after the end of apartheid have recently unwound.”

A comparison between the 2017/18 budgets, or Division of Revenue Bills, for the 2019/20 financial years by spheres of government showed that the provincial and local spheres of government, especially local and provincial conditional grants, bore the brunt of the fiscal consolidation efforts in the 2018/19 financial year.  Basically, the national sphere of government before direct charges was reduced by only R1.568 billion in the 2018 budgets, compared to the previous year. In contrast, provincial government transfers were reduced by R1.2 billion and R6.4 billion for equitable share and conditional grants respectively, and local government transfers by R3 billion. When looking at the 2019/20 comparison, the data showed that additional funding for national departments was R17.7 billion -- mainly for higher education and training -- and the total main budget expenditure reduction was R19.621 billion.

The case for recentralisation

Ms Poppie Ntaka, Researcher: FFC, said that the Commission’s report dealt with the issue of recentralisation, which was essentially, a reform that brought about a reduction in the autonomy of the sub-national governments. It basically refers to an increasing role and control by national government. Examples of recentralisation, or the national government expanding its footprint, would include the shifting of functions from sub-national governments to the national sphere or, in a financial sense, it when there was a reduction in the autonomy of sub-national governments over their fiscal resources. This was when they would start seeing an excessive use of conditional grants relative to the streams of revenue that a sub-national government would have discretion over.

Recentralisation was often based on the assumption that national government was better at service delivery or at ensuring that results were achieved. From their analysis, it appeared that governments were more prone to recentralisation during periods of fiscal stress. However, recentralisation raised various concerns and one such concern was that it ran contrary to the spirit and principles underpinning the multi-level system of government. If it was that the national government was expanding its role or its footprint and the result was improved, cost-efficient service delivery, and this was happening alongside the upscaling of sub-national government capacity, then maybe it could be argued that a larger role for national government was justifiable. Another concern was that the relocation of functions comes with definite financial implications for both the sphere gaining and the one losing the function.

With regard to the key findings, broadly speaking there had been a slight change in the way in which government responds in times of fiscal stress. During the 2007/8 financial crisis, national government’s footprint was seen as expanding, which was evident in the strong real growth of the conditional grants relative to the more muted or even declining growth in the block grants or discretionary funds, such as the Provincial Equitable Share (PES) or Local Equitable Share (LES). From the period 2015/16 up until the current medium term expenditure framework (MTEF) which was also characterised by low growth, the response had been quite different. Block grants had shown a more positive growth relative to the conditional grant funding, but the interesting bit was that whilst the amount of conditional funding had not grown rapidly, what was starting to show was the growth in the number of earmarked conditional grants, which were the pockets of funding within the existing conditional grants that had stringent conditions. Therefore, in a sense, it could be seen as a more subtle approach to centralising of fiscal control by national government.

Another key finding related to the earmarked funds within the Human Settlements-related grant. The FFC’s analysis found that national government was not necessarily better, raising a question mark behind recentralisation. For example, there were still high levels of unemployment, and a similar performance of the grant in the upgrading of informal settlements in mining towns. In terms of performance of service delivery, the mining town grant showed that in 2016/17, only 41% of the targeted sites were upgraded.

With regard to the third finding, which was derived from the case study on technical and vocational education and training (TVET) colleges, the colleges were relocated to the national sphere in 2012. The study evaluated the performance of the TVETs prior and post relocations, and found that some did improve after the reform. However, there were a number of colleges that had been efficient while under the provinces, but had now seen a decline post the reform. This implied that taking a blanket approach to reform was not necessarily ideal.

The FFC recommended that:

  • Government should not automatically resort to increasing the role of national government, since historical performance data does not generally show support for this leading to improved performance, considering the current constrained economic environment.
  • To improve service delivery and the attainment of specific priority outcomes, control measures other than the implementation of earmarked conditional grant funding must be developed and strengthened.
  • When recentralising a function is deemed necessary, a differentiated approach must be adopted – ideally government should focus on where the weaknesses within the performance lie, instead of applying a blanket approach which may negatively affect good performers.

Provinces’ role in primary healthcare

Ms Ntaka said the report also looks at the provincial fiscal adjustment mechanisms in the Health Department. Understanding that provinces play a critical role in providing primary health care, provincial health departments appear to be under severe pressure as a result of massive healthcare demands, coupled with poor growth and transfers. In the context of the current fiscal environment which puts health departments under pressure, the analysis asks which means are available to provinces to respond to the ongoing trend. Therefore, the intergovernmental fiscal arrangement had been assessed to check whether existing intergovernmental fiscal arrangements provide scope for provinces to adjust.

The key findings were that:

  • Intergovernmental fiscal arrangements limit the provincial scope for effecting necessary budget adjustments required during periods of fiscal constraint;
  • Little evidence of an impaired provincial fiscal position that could necessitate fiscal adjustment, assessed from a context of budget balance;
  • Provinces tend to use imprudent fiscal devices, such as expenditure accruals, to conceal negative budget balances and to plug fiscal gaps;
  • Major provincial fiscal adjustments tend to cascade from the centre through the cuts or additions made to the transfers;
  • Notwithstanding claims of provincial fiscal strain, alternative views attribute the source of pressure to episodes of fiscal mismanagement;
  • Incidents of cutting health delivery outputs to manage pressure were scant because of fiscal risks associated with such practices.

The FFC recommended that:

  • National and provincial treasuries, in collaboration with the national and provincial Departments of Health, should develop a framework or criteria for determining serious financial strain, with clear measurable financial and non-financial factors that could be monitored, reported and used to trigger automatic fiscal adjustment overseen by provincial legislatures.
  • The National Treasury and the Department of Health, through the respective Ministers, should allocate part of the 2019/18 MTEF health infrastructure budget towards gradually offsetting expenditure accruals which arise from unavoidable demand pressures for which allocated budgets were depleted. This would be conditional on meeting targeted reductions in accruals.
  • The Minister of Finance, through the National Treasury, should ensure that the framework for health infrastructure conditional grants – theHealth Facility Revitalisation Grant and the National Health Insurance (non-personnel component)) -- accommodates flexibility during periods of protracted fiscal constraint so that provinces can re-allocate their available capital allocations towards maintenance.

Incentive effects of intergovernmental grants

Mr Tseng said the FFC report considered the incentive effects of intergovernmental grants, presenting evidence from municipalities. Their analysis was on how responsive intergovernmental grants received by municipalities to revenues generated by municipalities are. They also assessed whether South Africa’s grant allocations led to grant-driven crowding out behaviour among recipient municipalities.

The key findings were that:

  • For metropolitan (category A) municipalities: Conditional grant transfers positively correlate with own revenue collection and also generate increased funding of capital outlays. On the other hand, increased equitable share funding (ESF) was associated with lower capital and operating expenditures;
  • For secondary cities (category B1) municipalities: ESF was positively correlated with own revenue, while unconditional grant transfers negatively impacted on operating expenditure;
  • For large towns (category B2) municipalities: ESF had positive effects on own revenue and expenditure per capita, but conditional grant allocations induced lower per capita outlays on capital and operational goods;
  • For small towns (category B3) municipalities: ESF was beneficial for own revenue and capital and recurrent  components of municipal spending, while conditional grants aided higher per capita spending on capital and operational goods and services;
  • For rural (category B4) municipalities: ESF was beneficial for own revenue and different components of municipal spending, while conditional grants tended to lower capital expenditure.

The FFC recommended that:

  • The Minister of Finance, through National Treasury, gives municipalities -- particularly those in small and rural municipalities (categories B3 and B4) -- greater flexibility in the use of grants to encourage innovative approaches to resolving local problems;
  • A fiscal capacity component be introduced into the equitable share formula to make it more efficient and incentivizing. The component should incorporate two aspects -- recognising the revenue-raising effort of municipalities, and recognising the redistributive element of addressing horizontal imbalances.

Key provincial infrastructure programmes

Mr Tseng referred to the report’s assessment of key provincial infrastructure programmes in the education, health and transport sectors. The analysis focused on how provincial governments, in the prevailing fiscal context, could achieve the same level of infrastructure with less money.

The key findings were:

  • Cuts to baseline funding for provincial infrastructure slowed down infrastructure delivery in the short-term. In the medium term, provinces could absorb spending cuts through efficiency gains, if infrastructure procurement and the built environment personnel at sector departments/public works were increased;
  • Aligning the planning, budgeting and implementation functions of provincial infrastructure delivery leads to better outcomes – currently these functions were separated between sector departments and implementing agents, thus distorting incentives and weakening the accountability chain.
  • Survey results showed that 91% of respondents (contractors) felt government procurement processes were not open and transparent, whilst 57% agreed corruption was most prominent during the procurement and tender phases of the infrastructure cycle.
  • When asked what percentage of the contract value was paid in informal payments or inducements to get government contracts, only 14% said no payments were made whilst 76% said payments of between 3-12% of the contract value were made to secure a government contract. For this, contractors paid a higher percentage of the contract value for smaller contracts relative to larger contracts, with a few notable exceptions;
  • The analysis of the infrastructure value-chain revealed that a lack of oversight at key delivery points was increasing the incentive to engage in fiscal misappropriation.

The key challenges that arise as a result of lack of oversight are:

  • Consultants are incentivised to over-design projects because their payment was often based on a percentage of the project cost;
  • There was no third party review of tenders awarded by implementing agents, even though they were solely responsible for appointing contractors with very little participation from sector departments – awarding projects to contractors without the proper grading and proven track record was a key driver of inefficiencies in provincial infrastructure provision;
  • Permanent onsite supervision of contractors was largely absent, allowing for the concealment of defects and the use of poor quality material.

The FFC recommended that:

  • The national sector Departments of Education, Health and Public Transport should develop clear performance evaluation frameworks for the provincial infrastructure grants under their control;
  • These departments should include greater scrutiny of requisition variation orders, such as automatic review and approval requests to provincial treasuries, when the value of these rises above acceptable levels of the project costs;
  • The Minister of Finance, through National Treasury, should set and publish the criteria to be measured in monitoring and evaluating infrastructure grants. The assessment criteria regarding infrastructure cuts should also be published.

Addressing water challenges

Mr Tseng said the FFC report also provided an assessment of the effectiveness of intergovernmental fiscal relations’ instruments in addressing water challenges. Their study assessed whether the fiscal instruments and other measures introduced through the IGFR framework helped to achieve the NDP’s goal of ensuring affordable and reliable access to sufficient safe water and hygienic sanitation for all.

The key findings were that:

  • Despite significant spending, access to safe and reliable water services was declining;
  • Inadequate expenditure on operations and maintenance was leading to service failures;
  • The current IGFR system incentivises this over-provision of infrastructure without providing for related operating/maintenance costs;
  • The goal of providing basic minimum infrastructure had been almost achieved. Priority must shift to sustainable operations and maintenance;
  • The provision of higher than basic water standards with limited revenue collection aggravates municipal, water board and the national Department’s financial deficits;
  • Poorly defined grant objectives allow substantial deviations from policy. The Regional Bulk Infrastructure Grant’s (RBIG’s) wide mandate mars accountability, and aggravates financial shortfalls.
  • Many municipalities do not pursue cost recovery for services provided at a level higher than basic. The result was a poor quality of service provided and inadequate funds to maintain infrastructure, leading to a high level of infrastructure system failures.

The FFC recommended that:

  • A review of the basic norms and standards for water services and the associated Local Government Equitable Share must be undertaken by the Department of Water and Sanitation (DWS);
  • Municipalities must indicate what standards they intend to provide and how their capital and operational costs were to be funded. This should be done through Water Services Development Plans;
  • In times of fiscal constraint, operating and maintenance costs must be prioritised;
  • Clearer statements of grant objectives, to achieve defined basic service levels or sustainability of services, must be established by the DWS;
  • Stronger conditions must be attached to financial transfers to ensure compliance and proper spending for the purposes indicated. Grant funding should be withheld from municipalities that do not have the necessary measures to monitor and control water consumption, or which do not meet criteria or have valid abstraction licences;
  • The IGFR system should shift towards incentivising sustainable operations and maintenance, and introduce a dimension of outcomes-based support for higher levels of service.

Dr Brown concluded the FFC’s presentation by stating that government needed to work with a consolidated effort to address inequality and poverty. There needed to be a balanced fiscal system, and all government activity had to be considered in a coordinated sense. There were inefficiencies in terms of planning.

The central message that underlies the various recommendations made was that in the context of the country’s intergovernmental fiscal system, three key issues must be faced:

  • First, there was an urgent need to properly understand the country’s economic challenges and to address them specifically and directly;
  • Second was the need to establish a balanced fiscal position that could be sustained over the long term; and
  • Third, the efficiency of all government activity must be sharpened so that citizens receive the best possible value for money from the taxes they pay.

Discussion

Mr N Paulsen (EFF) asked whether the FFC thought that national government would be able to do any better in delivering services in areas where there were service delivery protests. Would national government be better than local government?

Ms S Shope-Sithole (ANC) reflected on what had happened at Esidimeni, and asked what the FFC’s thoughts on it were. When the FFC spoke about recentralising, they had said national government was narrowing down services to the provinces, and that was not a good thing. Esidimeni was a lesson that when transforming, they should not use a blanket approach and should instead analyse a province individually. She asked whether the Esidimeni issue was a provincial situation. Did they lack funds? What was the reaction of national government? She was not sure what national government should be doing in situations of health and education. However, the Municipalities Act states that upper spheres should assist lower spheres. She was unsure whether an actual text instructing national government to assist existed, but the then Finance Minister, Mr Gordhan, had indicated that it was in section 44.

Mr N Gcwabaza (ANC) said that he agreed with the sentiment that a 10% increase in grants would alleviate poverty and allow communities to contribute to the stimulation of economic growth. He asked where the cuts should be effected in order to allow for this 10% increase. How would they balance the necessary investment spending as opposed to consumption spending -- not only in relation to social grants, as there was more to it than the grants? How would they tilt the balance to favour investment spending?

The presentation had indicated that the number of taxpayers liable for tax returns in 2015/16 had declined. The FFC was obviously making a point that there was poor tax collection. In terms of the 16 million people who were liable to pay tax, less those that were exempted, ideally how many had not submitted? Was poor collection the result of the system failing, or the ability of those who were supposed to be paying hiding and not paying? Would the number increase if that part of the problem was addressed?

That recentralisation could not be a blanket exercise was a compelling argument, because there were pockets of excellence that did not need it. One should rather do away with intergovernmental fiscal relations between national and provincial departments that make it difficult for national departments to hold provincial departments accountable, and for provincial departments to hold municipalities to account. How would accountability be strengthened in order to avoid recentralisation? The Committee had been vocal in strengthening intergovernmental fiscal relations, but had not been heard enough by government with regard to its recommendations, and there was a case for Parliament to be stronger in terms of its oversight.

Ms D Senokoanyane (ANC) said that she agreed with the point about recentralisation. Centralisation brought problems and a blanket approach was wrong, although perhaps they could intervene in particular sectors. Conditional grants at times were a problem because they instructed provinces to do certain things without considering the provincial priorities.

Accruals were deliberately made to avoid unauthorised expenditure, and the recommendation by the FFC in terms of that was correct. However, the FFC was recommending that part of the health sector be utilised to help accruals, because they were saying infrastructure investment was important.

Regarding withholding funding from municipalities, if no funding was given, what would the impact on the beneficiaries be? In some circumstances, there were capacity issues as well as the issues of inefficiency they have mentioned. In rural areas, sometimes people just did not pay municipalities and in other instances it was the government departments that did not pay municipalities. There were a lot of government departments that owed municipalities.

Ms M Manana (ANC) referred to the recentralising function, and asked what the reasons for the decline in the colleges were. The FCC had said that in their findings it was shown that national government did not perform better -- were there any concrete examples to support this funding? What was the FFC’s recommendation in terms of the provincial infrastructure programmes?

Mr A McLoughlin (DA) said that Professor Plaatjies mentioned that there was no infrastructure investment, yet the FCC had made no recommendations about it. The FCC seemed to be unsure of whether or not they were in favour of recentralisation -- were they for recentralisation, or not?

It seemed that when the South African Revenue Service (SARS) could not do their job, the blame was placed on the population for the lack of tax collection. The issue was the inefficiency at SARS, and that should change. What were they doing to improve the returns? What were they doing to improve efficiency? National government received taxes from the population -- it was direct taxation -- and National Treasury gets the money directly. The FFC was suggesting that citizens, having had tax already deducted must now be squeezed harder at the municipal level for more taxes. That was not an efficient way of doing things. If efficiency was good, they would not be having these issues.

Infrastructure investment was needed, and unless it happened, nothing else would change.

The presentation made mention of an intergovernmental fiscal instrument -- could the FFC explain what that is?

The Chairperson asked what informed the re-engineering of the IGFR system, and whether National Treasury was aware of it. Had they been consulted?

She said that when the Committee met with the FFC, they also learnt and sharpened their knowledge from the information provided. Could they please elaborate more on recentralisation, so that the Members could have a full understanding of it?

FFC’s response

Dr Brown said recentralisation was a function that had been de-centralised before, and was now centralised. The FFC had given the example of the TVET colleges. The issue was whether or not national government would do a better job than the provinces. The FFC were arguing against the blanket approach of recentralisation and stated that it needed to be on a case by case basis. Problems needed to be unpacked, and in some instances the answer was not to replace or remove a function, but rather to see whether the current mechanism could be improved. There was no upfront approach given -- they needed to look at it on a case by case basis. Government had to do a better job in unpacking issues in provinces. To shift a function always resulted in a setup cost, and any such changes had to be well considered. There was also a question of whether the current function was not being properly implemented.

What needed to be done to hold people accountable was the billion dollar question. They had to do better as a country and should not be talking about whose responsibility it was. Essentially, accountability had to be focussed on and determined to see what was needed. She was unsure whether the FFC had done anything on accountability frameworks, etc, but it was an important question.

They did not believe that recentralisation was always the answer. It may work in certain areas, but it must be evidence-based and the government must have the evidence before it decides.

A fiscal instrument referred to whether one used a block or equitable share, or a conditional grant. At times some of the conditions were related to fixing previous behaviour, and in other instances they could be limiting.

There were two kinds of recentralisation. There was fiscal, which was moving money, and actual, which was moving the function. If it was administrative, the decision-making power was moved. People probably do not move, depending on the decision of national government, and the key thing was not about the people moving but about the location of the decision-making.

With regard to Sedibeng (Esidimeni), she was not sure if any work relating to recentralisation had been done there.

In terms of re-engineering the fiscal trajectory, a structural change was needed. With regard to the econometric models, different options had been presented which they may not have considered.

The FFC had not made an explicit decision or recommendation as to where the money would come from. They had left that for the government to respond to.

Infrastructure investment was necessary, but as previously indicated, they could tolerate some cuts where that money may not be spent anyway. As a general statement, they were not in favour of cuts, but specific cuts may be needed, and that was where they may get funding.

Other inefficiencies existed in government spending, but it was also important to look at the efficiency in how the government was set up.

The FFC would have to come back to the Committee on the question regarding the number of liable taxpayers. The point they had been trying to put across was about the capacity to collect revenue, or the lack thereof. There were system issues, but the FFC had not disaggregated the issue any further. It was not the fault of taxpayers, however. It a catch 22 situation, because they were in a tight fiscal space -- did they increase the country’s deficit, and not hit the public? With regards to the question as to what the recommendations would be, the Commission had not done research in that area yet, but there was no upfront reason why they would not increase the deficit.

They had been looking at health revitalisation because there had been under-spending, but their recommendation stated that flexibility should be based on evidence from the provinces showing that they could manage it.

There were challenges where municipalities were not raising revenues, while the culture of willingness to pay was also a factor. There were fiscal discipline issues in this regard, and the government should resolve them.

90% of openness and transparency issues were indicative of efficiency challenges. The sample they had was the survey, which indicated that there were principal-agent problems. There was often a disconnect in the accountability chain, and that needed to improve.

Mr Tseng said that the levels of inequality and poverty were high, as well as unemployment rates, and there was a gap in terms of the distribution of income. Inequality should lower the ratio of tax to gross domestic product (GDP). The growth in the socio-economic base of SA had declined, which affected the growth trajectory and therefore the fiscal trajectory. If growth was exclusionary and not pro-poor, it was only going to get worse. Without growth, SA would not be able to sustain any pro-poor policy.

Regarding recentralisation, there had been significant under-spending for the first year, and the following sequence of events said something. The under-spending starts to shift, moves around between a direct and indirect grant. That was the story of recentralisation.

The equitable share should be informed by data.

With regard to the water issues and the impact on the beneficiaries, the ability to pay and affordability seemed to lose their identity in terms of where it sat, but the FFC would look at it more in the future.

Ms Ntaka said that to establish the reasons behind the declining TVET colleges after reform, they would have had to do research on individual TVETs to find out why they had experienced those specific declines. A reason could be that there was limited funding but increased enrolment. When they were under the provinces, they were able to have discretion.

Dr Brown said that there were competing priorities, and whether that was circumstantial had a bearing.

Further discussion

Ms Shope-Sithole asked about illicit capital flows. It was her suspicion that if a thorough study on that matter was done, they could perhaps be telling a different story. She suggested that the Commission apply its mind and do some work on this -- not in a hurry -- but it needed to be determined how much harm was being done to the country by illicit funding.

She suggested that the Commission look into the Sedibeng matter, because it was probably a roles issue -- the type of situation where someone probably thought someone else would do it.

She was concerned that the country was moving towards austerity. She had not found any empirical evidence where any developing country that had used austerity when in recession had come out better. It resulted in huge unemployment and debt, and she was not sure whether that was where the country should be going.

Was the recentralisation issue not a decision for Parliament? Who decides? She thought they would do what they were supposed to do. She was not convinced that national departments were better than municipalities. There was mismanagement indicated in the Auditor General’s (AG’s) reports in the national departments.  Should they, as the Committee, not be involved in deciding on the issue of recentralisation?

Mr Gcwabaza said the FCC had referred to recentralising a function if it was “deemed necessary,” and asked what they meant by “necessary.” They had said the same with regard to the provinces, and he asked  if they could explain that.

The FFC had indicated that adjustments had to be made to make some funds available. The R13 billion under-funding would not be found from budget cats -- it would have to be new money -- but how would they do that with the current fiscal constraints? Where would they get that money?

With regard to National Treasury allowing some flexibilities, what kind of flexibilities were these? What were municipalities allowed and not allowed to do, to help them improve services? He cautioned that grants in the past had been used to pay salaries, which defeated the idea of flexibility to improve efficiency.

He said that the purpose of the reform of the TVET colleges had been to locate them in the post-school setting, and therefore in higher education. Perhaps what was needed, however, was not to recentralise them physically, but rather to focus on properly funding national standards and evaluating their implementation. They had hastily recentralised, thinking that the problem would be solved. What was the FFC’s comment on that?

He said that Prof Plaatjies had indicated that the FFC were ready to tell them which departments had not responded to their recommendations, and he would like to know which departments these were.

The FFC should consider the President’s announcement on the stimulus package and the job summit outcomes and give a considered view and critique, and provide suggestions as to what the roles of Parliament should be in response to it.

FFC’s response

Prof Plaatjies said that they could provide information on which departments had not responded. There were departments that had not responded for 15 years.

They had consulted with National Treasury, and they were aware.

They had cross-checked what they had done in the Budget Review document.

The illicit capital flows was an interesting topic, but they were not there yet as the FFC. It would be useful for the Committee to call on the Financial Intelligence Centre to brief them about that.

There was not much that the FFC could tell them about the Esidimeni issue. There had either been a failure or collapse of governance, leadership or management, and he thought it was all three. There were lots of other similar cases – matters had not changed for the poor and mentally ill since the apartheid days.

He said that these issues were not new in SA. Money was needed to deal with the presence of grants, and to deal with first year of free education. These were not new policies -- they had been recommended before that the first degree should be free -- but then they had had the fiscal ability to do so.

The recentralisation issue was about the failure to deliver, or a collapse in systems. In every cycle, there was section 100 of the consititution, which provided for putting provinces under administration. How did they get to that point? The provinces had different pockets of section 100 and different pockets of section 39. It was conceivable that there could be nationalisation or centralisation. The specific needs of the community in those areas needed to be looked at.

There were severe fiscal pressures on health. There were four critical challenges facing health in SA, and the challenges raised the question of whether all provinces could be equally trusted to deliver health services to citizens. Lawyers for Human Rights had taken the FFC to court on the question of equality of quality and access to services.

The challenges included human capital. Financial resources were needed to recruit the right people -- people who were qualified for the job.

The other challenge was that of health financing. National Treasury might agree or disagree on this, but they needed to have that debate. They had never adequately costed health services or education. As a result, there would always be questions of whether health or education was adequately funded. Many departments had legal advisors, but they did not have experience. There were no people who understood contracting, let alone people who could manage the contracting. There was no contract management. There was the same problem in the FFC. There was a need for them to start thinking about how they could do contract management.

Supply-chain management of goods and services was another challenge.

The maintenance of infrastructure was another challenge. The crisis at Chris Hani Baragwanath Hospital was a major concern. There were issues of technology within the hospitals. The Health Minister was pushing for an improvement in this area, and the FFC supported that. There was also the issue of changing diseases. All departments would say they were under-funded and that was not the issue. The main thing was whether they had inefficiencies and how they dealt with those inefficiencies.

Dr Brown said that regarding function shifts, there was a process for dealing with that in government. They needed to go to the FFC for comment on, and then bring them to Parliament, perhaps via the budget.

Regarding health funding, the R13 billion was not significant, because it was a result of their calculations. What was key was that there were many departments that would argue against under-funding.

On the TVET colleges’ matter, they agree that they do not have to shift functions to set out national standards, but even within standards, how each region responded was important and had to be looked at.

Mr Tseng said that flexibility did not mean losing monitoring -- monitoring still continued.

Regarding the growth trajectory, how to grow was of great importance. SA needed to determine what they were selling to the world. He mentioned the industrial plans preceding the growth momentum created by Asian countries. The NDP was a guideline, but it also required industrial planning. The GDP was only an indicator, and how to grow had to be determined.

The Chairperson said that she wanted National Treasury to comment.

The FFC had mentioned that infrastructure investment was key. In the adjustment of the 2018/19 budget, they had seen infrastructure cuts which negatively impacted infrastructure projects. What was the recommendation regarding the budget cuts, particularly because this was a key point for employment and development?

Were recommendations being followed through?

Maybe the issue was weak oversight. What would sharpen oversight with regard to infrastructure development?

Prof Plaatjies referred to the infrastructure cuts, and said that their views were tabled at the 2018 Appropriations, and he would leave that to National Treasury. Their issue was the cutting of budgets, and they had asked what the standard of measurement used was. What was the test that National Treasury had applied?

If the Committee did not insist on their recommendations being considered, there was nothing that the FFC could do. The impact of the FFC’s recommendations was solely and wholly dependent on how Parliament assessed and implemented them. Parliament was realising that certain departments were getting away with it, and when things went wrong, they blamed it on National Treasury. People always wanted to ask for money from National Treasury, but they should be asking the Cabinet for it. National Treasury was where the purse was managed. It the Committee agreed with the recommendations, then the departments would know that the standard of measurement is.

The Finance Committee had said that the FFC had not thought through the VAT issue, but they had thought through it and made recommendations. However, the recommendations had not been taken up. The FFC was the only constitutional structure that was to advise Parliament, and their recommendations were directed at the departments, not at the Committee.

They had the responsibility of governance, leadership and management. They would advise them on where the inefficiencies were. The Departments of Transport and Rural Development had never responded for 15 years.

National Treasury’s response

Mr Steven Kenyon, Director: Local Government and Budget Framework, National Treasury, said that certain decisions had been taken but had not yet been announced, and was not his place to announce them. Therefore he may not be able to answer certain questions.

The issues of the FFC were the same issues that they had been experiencing. There were difficult challenges that they needed to balance, and their proposals in the midterm budget would reflect that.

On how reductions to restructure development had been made, the reductions were done to achieve the target. Certain amounts had to come from provincial and lower government grants. National Treasury had protected operational expenditure, and after that the only remaining place to reduce had been infrastructure. There were real issues around the efficiency of the R59 billion.

The FFC’s recommendations were taken as an input to the budget process, and were also shared with all the provinces and the SA Local Government Association (SALGA). There were increasing numbers of FFC recommendations which were unrelated to the division of revenue issue, and he could not appropriately respond to some of these. National Treasury coordinated the responses from both the direct and indirect recommendations, and then the relevant Minister chooses how she/he responds to them.

The Chairperson said that a lot of clarity had been brought forward on the process that the recommendations went through.

She made her closing remarks, and the meeting was adjourned.

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