Division of Revenue 2020/21: FFC submission
28 August 2020
Chairperson: Ms D Baartman (DA)
Video: BUDGET COMMITTEE, 28 AUGUST 2020, 09:00
The Financial and Fiscal Commission (FFC) made a submission to the Budget Committee of the Western Cape Provincial Parliament on the 2021/22 Division of Revenue in a virtual meeting.
The briefing focused on the challenges confronting the delivery of social services in South Africa. The FFC said these issues were not new and had been the subject of past annual submissions. The briefing also focused on economic and social development in the context of the Covid-19 pandemic.
The Committee was told that unprecedented fiscal and monetary policy interventions would be requiredto boost the South African economy to its pre- Covid-19 growth trajectory.
Members were told that challenges in intergovernmental fiscal relations caused fiscal tensions and sub-optimal delivery and development outcomes. The FFC recommended that the national government departments responsible for operationalising intergovernmental relations should invest in financial and human resource capacity to conduct these relations conscientiously and to emphasise the values of trust and cooperative governance.
The Committee heard that Covid-19 had had a devastating impact on South Africa’s economy and revealed persisting stark inequalities. The country should face this reality and grab the opportunity to leverage the crisis and effect structural change in the economy. The Ministers of Finance, Economic Development and Labour should jointly address economic barriers, social inequality, and societal polarisation by adopting a localised product value chain approach. With the right infrastructural and financial support from the state, emerging farmers could be the catalysts for local economic development and growth. .
A key challenge in delivering inclusive social services was the divide between policy and practice. The National Integrated Early Childhood Development (ECD) policy was approved in 2015, but had not yet been legislated. There was a need for greater and better-targeted funding and for the upskilling of ECD teachers.
There was a lack of accurate information on the number of learners with special needs and the type of intervention required. There was also an incomplete policy process for ensuring inclusive education.
Members wanted to understand if the National Health Insurance scheme would have made a big impact in stopping price inflation in private hospitals and corruption if it had come into effect from March 2020. They asked how the FFC’s research had been done and how intergovernmental relations could be improved to provide citizens with better interaction with the state. There were questions about the effectiveness of infrastructure-led development and foreign direct investment in creating jobs. Also of concern was the Provincial Equitable Share formula for dividing the national revenue.
FFC submission for the 2021/22 Division of Revenue
Professor Daniel Plaatjies, Chairperson, Financial and Fiscal Commission (FFC), remarked in his introduction that the briefing would focus on economic and social development in the context of the Covid-19 pandemic and on the financial structure for sustainable service delivery. He stated that the FFC was fully behind the introduction of a National Health Insurance (NHI) scheme. He went on to say agricultural matters were not only about the land. There was a great opportunity to look at a localised value chain, especially when it came to food security. There was a need to look at the greater role agriculture could play in economic growth.
Mr Eddie Rakabe, Programme Manager: Fiscal Policy, FFC, told the Committee that unprecedented fiscal and monetary policy interventions would be required to boost the South African economy to its pre- Covid-19 growth trajectory. In South Africa, empirical evidence showed a causal relationship between economic growth and government expenditure. From a policy perspective, the focus should be on government creating a conducive environment for growth.
Mr Rakabe said Intergovernmental Fiscal Relations (IGFR) arrangements for social services were fraught with multiple challenges which caused intergovernmental fiscal tensions and sub-optimal delivery and development outcomes. Findings indicated that a lack of clarity on the division of responsibilities for concurrent functions had created tensions in the delivery of social services. Structures to foster coordination, good governance and improved delivery were ineffective. The absence of standard methodology to estimate provincial expenditure needs had exacerbated perceptions of fiscal imbalance and budget “gaming”- deliberate under-budgeting by provinces. The lack of norms and standards had led to variations in allocations and service quality across provinces, and had caused intergovernmental fiscal disputes.
The current provincial equitable share (PES) formula continued to be relatively inefficient in its allocations. It could be improved significantly by incorporating certain aspects of the costed norms model. Data was available to differentiate the population by gender and poverty profile, factors that affected service demand and the costs of providing such services.
The FFC made several recommendations:
- The government should consider balancing the current benefit of simplicity in the PES formula with a move towards acknowledging the higher costs of providing services to vulnerable groups and the greater demand for services from certain demographic groups. The proportional distribution mechanism should remain in the PES, but higher weights should be considered for funding vulnerable groups in the areas of education and health.
- The national departments responsible for key concurrent social functions, especially education and health, should revise their enabling or subordinate legislation to ensure the roles and responsibilities for various functions were clearly detailed and linked to the accountability framework.
- The national health and education sector departments responsible for operationalising intergovernmental relations (IGR) should invest in financial and human resource capacity to conduct IGR conscientiously and emphasise the values of trust and cooperative governance. This also applied to the National Treasury and the Department of Cooperative Governance and Traditional Affairs.
- The reporting framework of provincial education departments should incorporate data in respect of both eligible and actual learners in the areas of early childhood development( ECD), youth vocational training, adult basic education and special needs education. They should be required to measure administrator-to-learner and computer-to-learner efficiency ratios.
Mr Cheng Tseng, Research Specialist, FFC, told the Committee that the Covid-19 pandemic had had a devastating impact on South Africa and highlighted stark inequalities that persist. South Africa’s response to this crisis could be either to try to return to business as usual, something which no longer existed, or to grasp the opportunity to leverage the crisis and effect structural change in the economy.
The real impacts of Covid-19 on the economy and food security were still emerging, but preliminary data from Stats SA showed that in the first six weeks of the lockdown, the number of respondents who reported receiving no income tripled, from 5.2 percent before the lockdown to 15.4 percent by the sixth week. Compared to other economic sectors, agriculture had been relatively insulated from the effects of Covid-19 because its operations were allowed to continue as essential services, although it had been affected by the closure of interlinking sectors such as restaurants, and food outlets.
After reviewing the economic situation leading up to the Covid-19 crisis, the FFC was convinced that fundamental structural transformation of the economy was inevitable. The Ministers of Finance, of Trade and Industry, and of Labour should jointly address the economic barriers, social inequality, and societal polarisation by adopting a localised value chain approach in the provincial and local government grants framework. There should be hard conditions to permit procurement of goods only if they were made or assembled within South Africa’s borders in order to stimulate the domestic economy and encourage job growth while taking international trade agreements into account. The FFC further argued that, with the right infrastructural and financial support from the State, emerging farmers could be the catalysts for local economic development and growth with the added benefits of food security.
Mr Tseng said South Africa’s health system was very vulnerable, given the country’s extreme socio-economic inequality and two-tiered health care system. In the face of the pandemic, there was a great need to examine fiscal, structural and legislative requirements for ensuring sustainable and affordable universal access to quality health care services through the NHI Bill.
He presented an analysis of the value of health care services covered by three major health care packages - a Primary Health Care (PHC) package, a Prescribed Minimum Benefits (PMB) package and a proposed demand-based, or Pareto, approach.
The research showed that a cost-effective health care package could be derived through a simple demand-based costing approach. With better and more reliable costing and output data, more efficient packages would be possible. The NHI Bill did not provide the information necessary for estimating costs, and left key costing considerations to be made through regulations.
The FFC recommended the Minister of Health should re-examine the prescribed PHC package. There should be reprioritisation within the current baseline allocation for PHC to ensure that care was available to those who came into PHC facilities in need of medical attention and curative treatments.
The Minister of Health should examine and eradicate the wastages, corruption and leakages that resulted from the disparity of the two-tiered system of private and public health care. In particular, decisions on procurement of health care goods and services should be made by consulting health professionals and workers with the necessary expertise and professional integrity. A portion of the department’s budget should be set aside for establishing a technical committee of health professionals to decide on purchasing and procuring facilities, instruments, and medicines.
Ms Sasha Peters, Programme Manager: Local Government, FFC, spoke on access to social services. She said the Government provided a range of services to families and communities. These were delivered by numerous departments across all three spheres of government. The Department of Social Development (DSD) was the custodian of the Government’s policy and programme of action when it came to families. The key challenge was the divide between policy and practice.
Stronger prioritisation was required. The National Integrated Early Childhood Development (ECD) Policy had been in 2015, but not yet legislated. There was a need for greater and better-targeted funding Even though it had improved, it was still insufficient and not reaching the poorest children. More funds needed to be targeted at non-centre based ECD programmes.
The training of ECD teachers was another area of concern. It had been estimated that only 39.2 percent of ECD teachers had an ECD qualification.
There was a lack of data on inclusive education. There was an incomplete policy process. An Education White Paper had been published in 2001, yet there had been no legislation enacted to give effect to policy aspirations. .Accurate information was needed on the number of learners with special needs and the type of intervention required. Ongoing teacher training was needed to assist in assessing learners requiring special needs education.
The FFC recommended that the DSD should lead the development of a three-year programme of interventions that proactively strengthened and stabilised at-risk families and communities, The Government should take urgent steps to strengthen funding for ECD. Priority should be given to funding non-profit, non-centre based ECD programmes serving population group quintiles one to three. As a matter of priority, the Department of Basic Education, together with relevant stakeholders, needed to determine the extent of learners with special educational needs. The Departments of Basic Education, Social Development and Higher Education and Training should prioritise the upskilling of existing ECD practitioners and develop a plan to professionalise the ECD career path.
Ms Peters said the FFC recognised that the repercussions of the Covid-19 pandemic would reverberate for years to come. Their submission on the Division of Revenue for 2021/22 had focused on the challenges confronting the delivery of social services in South Africa. For its next submission for the 2022/23 Division of Revenue, the FFC would provide a comprehensive assessment of the socio-economic effects of the coronavirus pandemic.
(Graphs and tables were shown to illustrate public expenditure and economic growth, population and poverty, unemployment by province, access to quality health care, access to quality education, and costing and pricing of health care packages: see attachment)
Mr R Mackenzie (DA) wanted to understand if the FFC was classified as an essential service under the Covid-19 regulations. He asked how its research was done. The reason for his question was that Members received presentations from different organisations at different times. They were only interested in who gave the input.
Prof Plaatjies said the research was submitted to Parliament long before the Covid-19 pandemic. Necessary methodological processes were followed. This included the combination of documentary data, analysis from international institutions, the SA Reserve Bank, the SA Revenue Service. Patterns in the agriculture sector had been studied. There had been an engagement with 20 private sector emerging farmers in the Western and Northern Cape on issues that were affecting them. Other stakeholders included the National Agricultural Marketing Council, the national Department of Agriculture and other provincial role players.
Ms N Nkondlo (ANC) asked how the IGR system could be realised for the benefit of citizens in their interaction with the state. She remarked that there was a lack of capacity in the legislatures. The members of the legislatures needed to be capacitated. She said it was good of the FFC to demonstrate how inclusivity in budgeting could be strengthened. She commented that she was uncomfortable with infrastructure-led growth. The problem with foreign direct investment (FDI) was that the value of money invested in infrastructure-led initiatives was usually not equal to the number of jobs created. Only a few jobs were created and the masses did not benefit.
Prof Michael Sachs, Deputy Chairperson, FFC, said infrastructure led-development contributed to development in many ways, but the problem was around poor planning for infrastructure that could deliver a service to the people and improve the productive capacity of the economy. Infrastructure development created a demand in the economy because the asset created made it easy to do business.
Mr Tseng added that a stable economic trajectory was needed to retain foreign direct investment in the country.
Mr Rakabe said the best way of achieving harmony between the state and its citizens was not to reinvent the intergovernmental fiscal system. The problem was that the forums that had been intended to facilitate harmony between national and provincial departments and budget offices were not working.
Mr L Mvimbi (ANC) wanted to know if there was a move to change the equitable share formula and asked what the view of the FFC was on this matter. He asked what the view of the FFC was regarding the role of provincial government in implementing ECD. It appeared there was no one who wanted to take responsibility for ECD and it remained an unfunded mandate. He asked how the FFC viewed the need for restructuring of the economy which had been exposed by Covid-19.
Prof Plaatjies said the equitable share formula would always be there. The problem lay with other issues, but not the formula. The formula looked at priorities on services that needed to be delivered. Budgets had to be done properly. It was important to look at the cost of what needed to be delivered. The national departments had their own views on provincial departments when it came to budgeting and funding of the provinces and municipalities. The discussion should rather be on the Division of Revenue.
Mr Rakabe said it was important to understand the expenditure needs of provinces. Poorer provinces were meant to get a bigger share of funds. But in some cases provinces like Gauteng and Western Cape tended to receive more because people moved there from poor provinces in search of better opportunities.
Mr Tseng said it was important to note that the share formula was data-driven. The key thing was how the money was conveyed from the national level down to provinces and municipalities.
With regard to economic development post-Covid-19, he said there was a need to be strategic and to look at the whole value chain to see how goods could be produced locally in order to create jobs. It was necessary to know what was being transformed. With Covid-19, certain products and services had to change, but in determining how that transformation was going to be done there had to be reliance on data and research.
On ECD, Ms Peters told Members that the national government was responsible for planning whereas the provinces were responsible for registration and monitoring of ECD centres and for rolling out funding for services. She said she was not questioning the roles of the different spheres of government, but multi-sectoral and intergovernmental structures had to play their role in providing concurrent services.
Mr Mackenzie asked if the NHI would have made a big impact and stopped price inflation in private hospitals and corruption if it had been effective from March 2020. He doubted whether the recommendations presented on agriculture, health, and labour were taken seriously by the national parliament and by the President and whether they would be incorporated in the medium-term budget. He wanted to know if the National Treasury was considering the growth that had been experienced in the Western Cape’s schools, ECD centres and housing. Was the FFC providing the National Treasury with its research data and recommendations? He also wanted to know if the FFC was holding discussions with the National Treasury to ensure value was obtained for the money given to state-owned enterprises (SOEs). Lastly, had the FFC done any research on job losses experienced by the middle class?
Prof Plaatjies told the Committee that corruption had been around for many years. There was a need to break the fraud relationship in public-private sector arrangements.
He said handling of the recommendations of FFC depended on provincial treasuries and legislatures. They had to adopt a position on the recommendations and take it to the National Treasury. On SOEs, he said the FFC needed to review their standing because money was going in, but delivery was not visible. On middle class job losses, he said this had been happening before Covid-19. South Africans needed to start looking inwards and invest in their own economy. They needed to think differently.
Ms Nkondlo asked whether the FFC could undertake a study to see if the IGR system was delivering on services for the people. Was it working in practice? The judgment of members of parliament was sometimes clouded by ideologies when looking at service delivery matters in terms of practicality. She asked if the FFC had reporting mechanisms for the equitable share allocations. There was always a tussle between the national and provincial governments. Provincial governments seemed to be the middleman in terms of budget allocation. Lastly, she asked if there was any tool for measuring effectiveness of FDI.
Prof Plaatjies emphasised that the equitable share formula was about how services were costed. It was important to look at inputs and outcomes. The FFC held conversations with the provincial and national treasuries regularly, but legislators had to discuss matters with the provincial treasury. The FFC was there only to advise. He said the FFC had not done any study on the efficiency of FDI. This was an area where information has not been easily available.
Mr Tseng added that the IGR system was the conduit between provincial treasuries and the national one. That was why the Committee had to engage with the provincial treasury. The FFC could only advise about the dynamics of the division of revenue.
Mr G Bosman (DA) wanted to know if there had been targeted support for non-profit ECD centres and if the system was working. Ms Peters stated the majority of interventions were of a statutory nature and intended to prepare for ECD needs before they arose.
The Committee resolved it should invite the FFC for a discussion on its recommendations and to participate in a workshop with the committee on the sustainability of municipalities.
The meeting was adjourned.
Baartman, Ms DM
Allen, Mr R
Bosman, Mr G
Mackenzie, Mr R
Mitchell, Mr D
Mvimbi, Mr LL
Nkondlo, Ms ND
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