National Treasury Presentation on Financing Social Grants

Social Development

16 September 2003
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SOCIAL DEVELOPMENT PORTFOLIO COMMITTEE

SOCIAL DEVELOPMENT PORTFOLIO COMMITTEE
17 September 2003
NATIONAL TREASURY PRESENTATION ON FINANCING SOCIAL GRANTS

Documents handed out:

Treasury Presentation on the Financing of Social Grants
Social Assistance Bill [B57-2003]
South African Social Security Agency Bill [B51-2003]

SUMMARY
Mr John Kruger (Chief Director of Social Services Public Finance) and Mr Daniel Plaatjies (Director of Social Security and Welfare Services Public Finance) made a presentation on the financing of social grants. Issues arising pertained to the discretionary powers of the Minister in the published Bill as opposed to the amended and discussed documents. Mr M Masutha was particularly vocal on the matter regarding the functions of the Agency taking on functions that would require legislative changes. The issue will be picked up on Friday 19 September.

MINUTES

Mr Kruger that the presentation dealt with a number of wide-ranging issues regarding the financing of social grants.

Social Security Funding
For the years 2000 and 2001, total security expenditure amounted to approximately R157 billion, with a comparably small R20 billion dedicated to social assistance grants. Categories included Retirement, Disability and Family, Employment and General Injury, Unemployment and Health Care, amounting to a 17.2% contribution to GDP. Categories with regard to public and private issues included social assistance, social insurance, tax expenditures, mandated contributions and pure private, which included a variety of savings vehicles. In the absence of a secondary mandatory tier, there was a large role for "private provision" in South Africa.

Social Grants Budget
Mr Kruger explained that Government spending in 2003/04 amounted to R304 billion in national revenue with a R29.5 billion deficit, amounting to R334 billion in total expenditure. State debt cost, contingency reserve as well as monies allocated to national, provincial and local expenditure formed part of the total expenditure. Concerning provincial spending, monies were allocated to education, health and social development with total spending for social services amounting to R83 million, R118 Million and R162 million in years 1999/00, 2002/03 and 2005/06 respectively.

It was general Government practice to spend more than it generated in tax. The R29.5 billion would be added to total debt as was done every year, so that debt decreased over time. This allowed for a healthy fiscal situation whereby there was a gap to spend more and accumulate less debt. The contingency reserve provided for the funding of unforeseen costs and was equitably allocated to provinces as the need to do so arose. Concerning the smaller share of social services expenditure as a proportion of total expenditure, the smaller allocation did not necessarily mean less expenditure. If current trends persisted, social development expenditure will exceed health expenditure, and questions had been raised as to whether this was appropriate considering the seriousness of HIV/AIDS in the country. Pertaining to average growth rates, real growth was increasing significantly so that more was being spent in real terms.

Provincial Grant Budget
There had been growth in the number of beneficiaries, particularly as far as the Child Support grant was concerned. Numbers had expanded with an additional 1.2 million beneficiaries. Expansion of the safety net would continue and budgets would be adjusted to accommodate the increase. In recent years, there had also been significant increases in social grant values to counter inflation. Expenditure for years 2002/03 has been inflated with an allocation of R2 billion to finance social grant arrears. As was current practice, social grants were financed by provincial revenues, and, in conjunction with national Government, they decide on spending on grants. The equitable share formula (ES) was composed of economic, education, health, welfare, basic and institutional components and indicated relative need. The higher the relative need, the more would be allocated to that province. Mr Kruger referred to the Eastern Cape, saying that 19.6% of the provincial budget had been allocated to health as there were more elderly, very young and poorer people in that province. "Basic" referred to the population share of the different provinces.

The Social Assistance Bill
Key aspects included the "administrator" as a different body, and the "implementation and execution" of the Act no longer being a provincial responsibility. Money would be appropriated from Parliament, not provincial legislatures. The Minister would assume responsibility for social grants policy and service delivery and the financing of these. An Agency would then be responsible for payment to beneficiaries. The CEO would have accounting authority and would in turn be accountable to the Minister. The Department would be responsible for issues around budget, monitoring transfers and advising the Minister.

Transition and Grant Funding
A function shift would require changes to the system of Government. The ES would also be affected because of the broader impact on provincial funding. The delivery system for social grants would also change. The moving of staff constituted complex transitional issues. The Department's role at national level would expand significantly. Another issue pertained to whether to determine the nature of social security grants expenditure by means of the ES formula. Alternatives included retaining the current method, determining the total and division of funds between provinces separately but transferring by means of the ES, or considering using the conditional grant mechanism. The problem was that policies and rules were made at national level, while the finance aspect and service delivery were provincial responsibilities. Centralisation of the process was envisaged whereby all three functions took place at national level. An alternative was to have the policy-making and finance responsibilities at national level, with service delivery at provincial level. A second option was that policies be made at national level, the finance responsibility be shared between national and provincial structures, and provinces provide for service delivery. Either way, it was essential that service delivery was improved and that any key decisions were made within a joint consultation. As far as process was concerned, there should be a phased centralisation of service delivery and financing, taking into consideration agency agreements and timelines.

The Chairperson opened the floor for questions.

Ms Chalmers asked what the effect would be of the absence of a second tier, and if it had ever been part of the welfare system.

Mr M Masutha (ANC) asked whether the same Committee that had been dealing with the Taylor report would be involved in the setting up and running of the Agency. He asked whether there would be an integration of the overall social security system into the process.

Mr Kruger replied that it there would be an overlap in membership and co-ordination. In terms of other social security functions, there should be scope for the Agency to expand into this area. Setting up the Agency would in itself be a formidable challenge. Social grants presented a simpler function than managing the Road Accident Fund (RAF) or the Unemployment Insurance Fund (UIF) and involved a more complicated financial arrangement. The focus at present was simply to provide social grants.

Ms G Borman (DA) said that the Agency was directly under the control of the Minister. She asked whether other bodies and Ministers would be brought in.

Mr Kruger said that there had not been detailed thinking on this aspect. There should be an agreement as to which Minister would assume primary responsibility.

Mr S Jehoma (Department) explained that the Agency would also deal with the RAF by means of an agreement of transfer of funding. An agreement will also be worked out between the Agency and the Department it would serve, as well as the Minister of Social Development.

Mr Masutha interjected and said that this proposal is over-simplistic. The administration of the RAF and UIF funding could not be regulated by agreements between Departments. Specifics of the administration should be regulated. However, this would only occur further down the line so there was sufficient time to work through these complexities.

Mr Daniel Plaatjies (Treasury) asked whether Agency functions should be limited to social grants.

Mr Masutha said that if the Agency wanted to deal with the RAF and UIF, the Act should be consulted to determine their functions if changes to the design of the system were contemplated. Only then could the function be delegated to the Agency.

Mr Kruger pointed out the difference between conducting administration of the RAF and UIF and simply accepting applications and making payments. The Agency would still have to take instructions from the RAF and UIF regarding this function.

The Chairperson said that there should be a full briefing of the functions envisaged for the Agency if it were to take on more than social assistance functions.

Mr Kruger said the Agency would focus on social assistance for the first 3 to 5 years, after which it could strike agreements between the Agency and the relevant Departments.

Ms N Tsheole (ANC) said that long- and short-term issues should be clear because the presentation only referred to the administration of social assistance.

Ms Borman asked what the acronym COIDA referred to. She also asked whether the Departments of Labour and Transport had been consulted on the decisions made.

Mr Kruger answered that COIDA stood for Compensation for Occupational Injuries and Diseases Act. With regard to other Departments' participation, there had consultation and a number of individual meetings but Departments were not part of the Committee.

Mr Jehoma added that the different clusters working on the Comprehensive Social Security all fitted into the social cluster on which the Directors-General gave input. This served as the vehicle through which social delivery components could be delivered.

Mr Masutha said there was no problem with integration as such. The issue pertained to the difficult exercise of engineering the Bill to go beyond social assistance funding. The implications of the Agency taking on the functions of the RAF and the UIF should be examined. The process of accessing payment for these particular funds would require the Agency to have specific competencies that were not necessarily required for social assistance functions. There was nothing wrong with making a statement of intent at this stage, as long as it was for social assistance.

Ms Borman stated that there seemed to be complicated co-ordination problems with regard to provinces using money allocated to social developments to fulfil other obligations.

Mr Kruger said that the pictures painted in the presentation were much neater than the reality. Monies allocated to provincesawere split in terms of their relative shares. Provinces made different decisions as to how much was allocated to which sphere.

Dr E Jassat (ANC) pointed out that provincial figures presented were pre-Agency figures. He asked whether figures would decrease after the establishing of the Agency.

Mr Kruger answered that this might be an interim step because a decision had to be made between national and provincial authorities as to how monies were allocated. Problems of co-ordination could occur. If overspending happened, provinces might claim that monies were insufficient while at national level, the argument would be that provinces had simply spent beyond their means.

Mr Plaatjies added that national government would handle policy-making while finance and delivery functions would be provincial responsibilities.

Mr Masutha asked which model would be used for financing. If the budget moved from the ES formula, it had to coincide with the phasing out of grants which in turn had to coincide with moving from one form of budgeting to another. Another issue was that of moving human resources. The budgeting system had to coincide with the legislative framework to make the necessary legislative arrangements.

Mr Kruger said that within transformation, money would still have to come from provincial legislatures. This was no problem as such, but guidance in this area would still be necessary.

Mr Masutha stated that the national sphere would become legally accountable if the Act relocated all functions to national level. Conditional grants provided security as shortages in funding could be followed up with litigation. The ES formula on the other hand did not provide the same security because there was little control as money resources were moved around. The legal duty to pay-out was vested in provinces, but there had to be accountability at national level.

Mr Kruger agreed that this is a key issue to bridge in transformation. Conditional grants were not as straightforward as described before. It had to be ensured that monitoring and other conditions attached were implemented, after which the Director-General had to approve the process. The accounting responsibility would be that of the Provincial Accounting Officer.

Mr Da Camara (DA) referred to the percentage of the welfare budget spent on grants in provinces. He asked how this would be affected after adjustments made to facilitate the Agencies. The infrastructure collapse of other services should be avoided.

Deciding how much to take out of provincial baseline budgets was a key decision. Mr Kruger explained that implications for social development were being investigated by means of detailed calculations still under discussion with provinces. If what was spent on social services wa taken out of the budget, some provinces would have more money dedicated to social services. A detailed implementation draft plan outlined 3 phases. The first phase dealt with implications and choices for Government, the second was a blueprint of the plan and the third was an implementation strategy for consideration.

Mr Plaatjies said that the continued relevance of a department dealing with social assistance was a concern. Meetings with Social Development Departments regarding beneficiary growth, expenditure trends and projections for years to come were an annual exercise.

Ms S Rajbally (Minority Front) noted the increase in child support beneficiaries. She asked whether provinces were able to meet the requirements of the increases.

Mr Da Camara asked whether staff and infrastructure would be shared between Departments.

Regarding the question of child support beneficiaries, Mr Kruger said that there had been attempts to guide provinces to budget for the increases as accurately as possible. Backlogs should be avoided and therefore annual discussions with provinces were crucial to avoid financial pressures. The overall provincial budget depended on how much should be taken out to fund the Agency at national level. There would not be a reduction in monies for social services. Committees in provinces were charged with the responsibility to ensure that centralisation of welfare services worked to the peoples' benefit.

Mr Masutha commented that Health and Welfare had been one entity, but then they split and Social Development was forced out. Now that provinces were no longer taking responsibility for social grants, there was no incentive for them to transfer staff and other assets. There had to be a situation where full capacity was developed for rigorous standards, as well as consideration of budgetary implications. A date of transfer of functions from state to agency had to be announced.

The Chairperson asked Mr Jehoma when this would come into operation.

Mr Jehoma said that it depended on getting a good sense of the budget and engaging in a ringfencing process. The decision on this matter should be quick. Some processes had already been kick-started. A final decision should be forthcoming before the end of the year.

Mr Kruger added that the decision between using the ES formula or the conditional grant fitted under current legislation. In anticipation of the transition, the budgeting process should be enhanced in the interim. One year could not operate on the basis of the ES formula and then the next year convert to the national share formula. It would be better if provincial and national financial years could coincide. There were budget implications for service delivery improvements. A legal mandate for ringfencing should be forthcoming next year.

Mr Jehoma said that these issues were being looked at in detail because concerns had been raised before. Transition issues pertaining to rights, obligations, staff and assets had all been taken into consideration with regard to the implementation plan. The Department would appreciate any input from the Committee.

Ms Borman asked whether other options had been recommended by the Financial and Fiscal Commission (FFC).

Mr Kruger explained that the FFC would be making recommendations. Weights and data used from Census 2001 were taken into consideration. The phasing in of a new formula should not be disruptive.

Mr Masutha asked whether unexpected increases or decreases in demand or beneficiaries could be dealt with. He asked if some kind of adjustment was possible.

Provinces had adjustments annually and should there be pressures or unexpected growth, provinces were entitled to a fair share of the contingency budget.

Mr Da Camara pointed out that problems had arisen because policies were made at national level and then there were hand-outs at provincial level. He asked whether there could be a separate role for these functions in Parliament.

Mr Kruger said that it was preferable that the Agency Act be close to the Department to avoid long budgetary processes and to facilitate regulatory or cost changes should these arise. The Agency and the Department could not be separate because the budget process was very important. The problem of bargaining would be avoided and contained if the Agency was close to the National Department.

Mr Masutha said that the design of the current Bill did not allow for the administration of grants from the Department to the Agency. The Department would assist in terms of norms and standards regarding implementation and monitoring. The Minister was still ultimately responsible but actual implementation would fall to the Agency.

Mr Plaatjies pointed out that the presentation was based on the current Bill and not on changes or amendments to it. He asked about the standing of the third draft and if there had already been changes to the Bill. If changes to the Bill had been made known, there would have been a different view on financial and fiscal issues. He asked whether deliberations were up to date and that concrete changes be made known for a better understanding.

Mr Kruger added that the Bill stated that the Minister did not automatically delegate to the Agency. The presentation was based on the original version, not on Committee discussions of the Bill. Treasury and the Committee were clearly talking from different documents.

Mr Masutha pointed out that Parliament administered functions to an agency, so there was no need for anyone to delegate.

Advocate W Krull (Department) said that no changes had been adopted, and therefore the discussed documents that had been circulated had no formal weight at all.

Mr Masutha argued that this was a mere technicality.

Mr Plaatjies commented on the pointlessness of presenting on a Bill with which they were not familiar.

Mr Masutha explained that it did not necessarily mean that the Minister did not have powers just because the Agency had statutory powers. As was previous practice, the Department regulated norms and standards and the budgetary function in Government. The Director-General entertained applications and then delegated further functions to officials of the Department. Now Parliament assigned directly to the Agency to deal with functions as set out in the Bill.

Mr Kruger asked why discretionary power was taken away from the Minister. This would only create problems in the transition phase.

Mr Masutha recommended that the Treasury peruse both Bills dealing with the Agency and its powers, as well as the Social Assistance Act. Issues of delegation became irrelevant because functions were already assigned.

The Chairperson asked about the timeframes suggested.

Mr Kruger replied that they were not aware of specific timeframes. A report on the Implementation Strategy was awaited.

Concerning inventory assets, Mr Jehoma said that there would be a thorough operation conducted for financial ring-fencing next year. If provinces agreed and no legal mandate was necessary, issues around assets and liabilities could be finalised soon. Other issues would have to be staggered.

The Chairperson noted the Treasury's request for sensitivity around issues around staff, financial and fiscal concerns and transitional arrangements.

Ms Borman asked whether the R105 million earmarked for the expansion of the Department would include the Task Team's assisting in implementation. She also asked where the Agency would be located.

Mr Jehoma answered that R105 million would cover national staff and the Agency for one year, including operating expenses, information and technical equipment, the ERP system and phasing in.

Mr Kruger replied to the question on location, saying there needed to be a headquarters as well as regional district offices. The location of these had not yet been decided.

The Chairperson said that the Committee would pick the issue up on Friday 19 September.

The meeting was adjourned.




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