Trends in Intergovernmental Finances: briefing by National Treasury

NCOP Finance

03 October 2004
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE, EDUCATION AND RECREATION & SOCIAL SERVICES SELECT COMMITTEES: JOINT MEETING
4 October 2004
TRENDS IN INTERGOVERNMENTAL FINANCES: BRIEFING BY NATIONAL TREASURY


Chairperson
: Mr T Ralane [Free State} (ANC)

Relevant document
Trends in Intergovernmental Finances 2000/1 - 2006/7 [offsite link]
National Treasury presentation on Intergovernmental Fiscal Review

SUMMARY
The National Treasury presentation outlined the trends in provincial budgets, local government finances and the spending trends for education, health, social development, agriculture and land, roads and transport, housing, water and sanitation and electricity 2000-2007.

During the discussion Members commented on:
- the significance of the Inter-government Fiscal Trends for parliamentary oversight
- the discrepancy between social spending and spending on infrastructure
- the reason for the decline in provincial capital spending especially on social grants
- measures that provinces could take to improve their own revenue generation,
- the reason for the decline in capital expenditure for North West province over the next 3 years
- why local government personnel costs have risen by 15.2%
- the measures to reduce the learner to educator ratio to a more acceptable ratio.
- the need for the number of teachers to be increased in order to improve education
- measures to be put in place to improve the teaching of mathematics in the Eastern Cape
- if funds were allocated to health research and development, especially alternative medicines
- allocation of provincial spending on grants to the Social Security Agency
- measures to ensure that more black farmers owned farms
- the status of the land restitution programme,
- whether local municipalities were allowed transport conditional grants
- the effect of the national department taking over certain provincial roads
- whether funds should be directly allocated to provinces for road maintenance and a portion of the fuel levy be paid back to the provinces to take care of their own roads
- if the allocations to the Department of Housing were sufficient to enable it to achieve its target within ten years.

MINUTES
Presentation by National Treasury
Mr Lungisa Fuzile, National Treasury Chief Director: Intergovernmental Provincial Policy, conducted the presentation (document attached) which outlined the trends in provincial budgets, local government finances and the education, health, social development, agriculture and land, roads and transport, housing, water and sanitation and electricity spending trends in Intergovernmental Finances 2000-2007.

Discussion
Trends in provincial budgets
Mr S Shiceka (ANC) [Gauteng] asked Treasury to explain whether systems were put in place to ensure that the social grants system was not abused. Secondly, he asked about the purpose of the Intergovernment Fiscal Trends document.

Mr Fuzile replied that the primary aim was to present political office-bearers with information from all the provinces, which Members could then use as a starting point when building on Parliament's oversight role. After publishing the Medium Term Budget Policy Statement (MTBPS) and the subsequent Budget, the Minister drew from deliberations in Cabinet, the Budget Council and the Extended Cabinet, to decide on the division of nationally raised revenues based on priorities and set objectives. The aim of this document was to check the progress made on government's stated objectives within that period.

The document indicated that 3 years ago government had spent R20b on social security grants, and now spent R42.4b, which was more than double the spending on social security grants.

Ms J Masilo (ANC) [North West] sought clarity on the indication in the presentation that there was a 0% contingency reserve in the provincial spending patterns for the years 2000-2005.

Mr Fuzile replied that these funds were not actually spent, but were instead provisions for a rainy day, used to deal with unforeseen expenditure. These were however not large amounts.

Mr J Tolo (ANC) [Mpumalanga] stated that there was much discrepancy between social spending and spending on infrastructure. The result was that, with regard to roads for example, provincial roads were deteriorating because they were not receiving as much funds. What could be done to address this problem?

Mr Fuzile responded a number of initiatives were taken to address the funding of all provincial infrastructure, especially provincial roads. The allocations to provinces through the equitable share and even through the conditional grants via the provincial infrastructure grant have been increased over time in part to allow provinces to spend more on roads. There might be a disjuncture in some cases between national government's intention and what actually transpired at provincial level. The figures included in the presentation do indicate significant growth in provincial allocation such as in the Eastern Cape province. The Department of Transport has been engaging its provincial counterparts in identifying the roads that were crucial to economic activity as part of a national road network. This could even result in some roads being reclassified as national roads.

Mr Tolo asked Treasury to explain the reason for the decline in the provincial capital spending especially on social grants.

Mr Fuzile replied that this decline should not necessarily be viewed as a negative occurrence. It simply suggested that in the past the Gauteng province for example had focused significantly on prioritising social services, and felt they should now focus on other areas as social services was satisfactorily funded. The presentation indicated that spending on education grew in real terms from R43b in 2000 to R60b in 2003, even though its share dropped from 39.6% to 35.3%. Yet spending on other matters such as social grants grew faster.

Mr Tolo stated that there was a problem with South Africa's 'soft borders' with countries such as Swaziland or Mozambique, because children from those countries were entering the Republic and accessing social grants. He asked if Treasury's allocations took this problem into account.

Mr Fuzile responded that this problem did not have a ready solution. It was only when a census was conducted that government would know how many people resided in each province. It was hoped that the distortions that would arise from this data were not so significant as to render the final figures inequitable.

Ms B Dlulane (ANC) [Eastern Cape] asked Treasury to explain the problems in the Eastern Cape province that justified its incremental increase in total expenditure during 2000-2007.

Mr Fuzile noted that his presentation stated that in 2000 the Eastern Cape government spent approximately R263m on capital expenditure, which amounted to about 1,4% of its total capital expenditure. Over the following 3 years the share of capital expenditure rose to about 6%. This positive trend occurred across all provinces except the North West.

Mr E Sogoni (ANC) [Gauteng] pointed out that there had been more non-financial information in the Intergovernmental Fiscal Review than in the Intergovernmental Fiscal Trends document. He suggested that for oversight purposes, more non-financial information was needed in the latter.

Mr Fuzile responded that the intention was not to supply less non-financial information in future, instead Treasury observed that on a year-by-year basis the non-financial information did not change much. The decision was thus taken to update the financial information each year, because it served as a first indication for many financial indicators.

Mr Sogoni asked whether the 47.3% spent by provincial budgets on employee compensation was in line with international trends.

Mr Fuzile replied that even if the absolute spending on personnel was high, the downward trend was welcomed because in the past personnel spending in provinces such as the Eastern Cape on education was as high as 95% of total expenditure on education. It was hoped that the declining trend in personnel expenditure would release some of the resources.

Mr Sogoni sought clarity on the R3b surplus in government expenditure during the 2001/2002 financial year.

Mr Fuzile replied that the surplus occurred when in one financial year a provincial department did not spend less than the revenue it accumulated in that year.

Mr Sogoni asked whether provincial own revenue was declining as a percentage of the budget, or whether it was declining in real terms. He asked whether there were any measures that provinces could take to improve their own revenue generation.

Mr Fuzile responded that Treasury has conducted analysis which suggested that there were two possible explanations for the declining trend. Firstly, in the past provinces had cash balances, and when that cash balance was depleted those funds would be lost. Secondly, it appeared that provinces, because they were concerned as to whether they would be able to collect all the revenue, believed that the safest route would be to under-estimate the target. Whether provinces were too conservative here was a judgement call, but Mr Fuzile contended that they were.

Rev P Moatshe (ANC) [North West] sought clarity on the reason for the decline in the percentage of capital expenditure for the North West province over the next 3 years.

Mr Fuzile replied that he only knew part of the reason for the fluctuation in the North West. The fact was that about 2 to 3 years previously most provinces underspent on the housing grants, with the result that there was a capital roll-over. This resulted in a larger capital share in the following financial year, and all the funds would be spent so that there was no roll-overs from the previous year. This could reflect a decline but, as explained, was not necessarily a bad thing.

The other possibility could be that the fluctuation was merely a correction where provinces in the past increased their capital expenditure, and then realised that they had set the target too high and would then decide to reduce the spending again.

Rev Moatshe stated that there was an additional problem in that there were cases in which a single house was constructed yet four separate payments were received for that one house, because the system was being abused and no monitoring mechanisms were in place. He stated that he could not understand the fluctuation in the North West figures, given such anomalies.

Mr Fuzile replied that the factual situation would be one involving the roll-over, as explained earlier and this would result in an increase in the province's spending for that financial year. This did not necessarily involve allocations that have ballooned but were instead roll-over funds from the previous financial year. Treasury had battled with the North West province regarding its slow spending on infrastructure such as roads and schools.

The executive in the North West government could legitimately decide to spend less on capital, perhaps because past experience had shown that it did not have the necessary capacity to spend the money.

The Chair urged Members to bear these matters in mind when the Committees hosted hearings with the different provincial departments the following week.

Local government finances
The Chair urged Members not to exhaust all the matters because they should be raised in detail during the hearings.

Mr N Raju (IFP) [Kwazulu-Natal] stated that personnel costs had risen by 15.2% which was 'insanity', as some city managers were being paid more than the State President.

Mr Fuzile agreed that the spending was rising, but it was a question that the Department of Provincial and Local Government would be best placed to answer and to address the problem.

Education spending
Ms D Robinson (DA) [Western Cape] stated that although the presentation indicated that the reduction in personnel costs was welcomed, she believed that the current numbers of teachers must be increased in order to improve education. This was the most important thing.

Mr Fuzile replied that a balancing exercise was needed, because in some cases more teachers were needed whereas in other cases teaching materials were needed more urgently.

Mr Tolo requested international comparisons with other developing and developed countries as to whether the spending of 34,7% of the total budget on education was an acceptable norm.

Mr Fuzile responded that South Africa compared favourably with other countries. Yet this was just the starting point as the more pertinent issues where what the funds were spent on, and what was happening within the teaching and learning environment. The Department of Education would be better placed to answer these questions.

Mr Shiceka sought clarity on the measures to reduce the learner-to-educator ratio to a more acceptable ratio.

Mr Fuzile responded that the ratio was fairly good and stood at about 34:1. The spending did however involve a difficult balance.

Mr Raju stated that the presentation did not mention the R800m allocated to nutrition in primary schools programme which the previous Minister had indicated would now be taken over by the Department of Education from the Department of Health.

Mr Fuzile replied that this had shifted to the Department of Education as of April 2004.

Mr Raju sought clarity on the measures to be put in place to improve the teaching of mathematics in the Eastern Cape, because it was a worrying factor that so few matriculants in that province took mathematics on the Higher Grade.

Mr Fuzile replied that this was a problem, and there was a clear disjuncture between the needs of the country and the results produced by the Department of Education. Possible solutions could include offering bursaries or paying teachers more to teach in the rural areas, as an incentive.

Mr B Mkhaliphi (ANC) [Mpumalanga] sought clarity on the effects of the merging of the education institutions, especially the revitalisation of Further Education and Training (FET).

Health spending
Ms F Nyanda (ANC) [Mpumalanga] asked whether there where monitoring mechanisms in place to guard against cases in which doctors assist people to fraudulently receive social grants.

Mr Fuzile replied that he could not attest to this as a Treasury official, but stated that there were mechanisms in place within the system to deal with such offences and offenders.

Ms Masilo sought clarity on the impact of provinces who had spent over 100% of their allocations.

Mr Fuzile responded that the figures over 100% merely indicated the provinces that spent more than the national average, and not more than 100% of the provincial budget.

Mr Van Rooyen questioned Mr Fuzile's statement that the growth of the Health budget by 4,9% was good, as that figure had fallen below the inflation rate.

Mr Fuzile responded that the figure was actually 4,9% above inflation.

Mr Van Rooyen questioned Mr Fuzile's statement that the decline in health spending from 21,7% to 21,4% was acceptable as this was not consistent with the population growth.

Mr Shiceka asked whether any funds were allocated to research and development in the health sector, especially alternative medicines.

Mr Fuzile replied that Parliament had passed a Bill which dealt with traditional medicine.

Social development
Ms Hoosain, Chairperson of the Finance Standing Committee in the Eastern Cape Provincial Legislature, stated that the documentation needed a table that compared appropriation with actual spending. The problem in the Eastern Cape was that it had consistently overspent on grants. She sought clarity as to whether the actual expenditure or the allocation would then be allocated to the Social Security Agency, in the absence of such a table.

Mr Fuzile responded that the exact amount of the expenditure that would be taken away from provinces for social security was currently being worked out. The intention at this time was to put in place an allocation that was in favour of provinces.

Mr Hoosain stated that the lack of such comparative data prevented the movement towards a costed norms approach.

Mr Fuzile replied that during 2003 such a comparison between actual spending and the appropriation was provided in the annexures. There was an anomaly in the Department of Social Development as departments tended to spend more than their actual allocation.

Ms Robinson asked if children's homes which accommodate children with disabilities fall under the Department of Health or the Department of Social Development.

Mr Fuzile responded that he did not know the details on this issue. The two departments would be best placed to answer the question.

Agriculture and land
Mr Shiceka asked whether measures were in place to ensure that more black small farmers owned farms, because farms were currently still owned by the elite few.

Mr Fuzile agreed that this was important. National government has introduced the conditional grant, but there was nothing preventing provinces from allocating even more funds to that kind of programme. Government had decided to set aside R750m for farmer support over the next 3 years.

Ms Hoosain stated that gender-based disaggregation must be considered, because it was one possible area for changing the expenditure patterns within agriculture.

Mr Fuzile responded that this was a difficult issue because more information was required to provide a costed norm. Some sectors such as social security grants lent themselves to this type of costing, but there were too many variables for other sectors such as education and health such as the cost variations between the two provinces. It was thus not viable at this point.

Rev Moatshe stated that he could not understand the statement in the presentation that there was high spending on personnel but a shortage of appropriate skills, as surely high spending would ensure appropriate skills.

Mr Fuzile replied that this was in the nature of things. Agricultural colleges used to assist in producing people with appropriate skills, but he was not sure how well they functioned these days.

Mr R Tau (ANC) [Northern Cape] asked Treasury to explain what percentage did agriculture comprise of the total budget.

Mr Fuzile responded that provinces spent about R4b on agriculture against a total of about R186b, which amounted to about 4%.

Mr Tau sought clarity on the status of the land restitution programme, and asked whether the target set by the President for 2015 was achievable.

Mr Fuzile replied that there were a number of unresolved cases that were currently in the legal system. It was important to note that before land could be allocated the land itself must first be available.

Transport and roads
Ms Masilo sought clarity on conditional grants for transport to local municipalities, especially those who started with zero base budget.

Mr Fuzile responded that municipalities did receive funding via the Municipal Infrastructure Grant (MIG) for this, although it tended to focus more on water provisions etc. There were municipalities that did raise funds via property taxes on their major roads. National government cannot grant 100% of the allocation to municipalities, as the formula for allocating resources to municipalities has been reviewed and aimed to allocate more funds to the poorer municipalities than to those who were able to raise their own revenue.

Mr Raju asked whether subsidies would be granted to taxis as well.

Mr Fuzile replied that this was a policy issue that best dealt with by the Department of Transport.

Rev Moatshe welcomed the statement in the presentation that the national department would be taking over provincial roads, because it appeared that the provinces were not properly maintaining their provincial roads. He asked if local roads would remain within the jurisdiction of the local municipalities.

Mr Fuzile responded that the reclassification went beyond mere funding. The decisions was taken to declare roads which included both national and provincial portions as a national road in its entirety, so that the national Department could then maintain a road as it saw fit without first having to consult the province. The National tier might have more innovative means of financing these matters.

Mr M Sulliman (ANC) [Northern Cape] questioned the decision to declare provincial roads as falling under the national department and then to provide funds to the national Department to take care of those roads. Instead funds should be allocated to the province directly to maintain the road.

Mr Fuzile replied that if national government did this it would impose a conditional grant which included a guarantee that the funds would be spent on roads. This might cause bad blood if the provincial government felt that these funds could be better spent on something else.

Mr D Worth (DA) [Free State] asked why a portion of the fuel levy was not allocated to a road fund and paid back to the provinces to take care of their own roads.

Mr Fuzile responded that this could be undertaken by the provinces if they so wished. It was however not always the best route to follow because, in some cases, provinces could raise significant amounts of funds but might not have sufficient roads to spend it on at that given time.

Housing
Mr Tolo stated that the Minister had announced that the Department would embark on an accelerated delivery programme, and had set a target for 10 years. Yet the allocations in the presentation did not appear to be sufficient to enable this target to be achieved within 10 years.

Mr Fuzile replied that it was only last year that spending on housing got close to exhausting all the funds allocated. He doubted whether the doubling of the allocation would, in real terms, translate into the doubling of the pace of delivery.

Mr Tau requested the Department of Housing provide a breakdown of the exact figures and funds that were allocated to it.

Water and sanitation
Rev Moatshe asked Treasury to explain why the funds allocated over the next 3 years do not reflect a problem with "substantial backlogs" as indicated in the presentation.

Mr Fuzile replied that only a handful of municipalities have begun preparing their budgets in line with the Medium Term Expenditure Framework (MTEF). Government will have to move in this direction over time, as it was required by the Municipal Finance Management Act (MFMA).

Mr A Moseki (ANC) [North West] asked Treasury to indicate the steps it was taking to work with the Department of Water Affairs and Forestry in equipping provinces with the necessary capacity to provide water services throughout the country.

Mr Tolo stated that it appeared that about R13b was allocated to water and sanitation, yet the main outcry from communities was that they did not have access to basic water services.

Electricity
Mr Tolo stated that it was a problem that most of the communities, especially the poorer communities and those in the former homelands, were supplied with electricity directly from Eskom and the municipality did not receive a cent. Yet those municipalities who provided electricity to their communities themselves were able to use that revenue to ensure proper service delivery in a variety of areas.

Mr Fuzile responded that nothing prevented a municipality from levying a charge on any service that the Constitution described as a municipal service, including electricity, regardless of the arrangements between a municipality and any agency for the provision of electricity.

The following questions were not answered by Mr Fuzile
Mr Shiceka asked Treasury to explain how Members could sharpen Parliament's skills to enable it to properly execute its mandate in scrutinising local government finances.

Mr Worth stated that probably 70% of the provinces' own revenue was generated from motor vehicle license fees and fines, and questioned why this was not allocated to the province in a designated fund to be spent on roads infrastructure.

Mr Tolo suggested that those municipalities who could not generate their own income by imposing levies, for example, should be granted the full 100% of the equitable share until they had such revenue-generating mechanisms in place.

Rev Moatshe stated that the State President specifically allocated funds for the building of schools, yet there were still cases of "classrooms under trees".

Ms Masilo stated that the decline in expenditure in the North West province on social grants, especially foster care and care dependency grants, was a worrying factor.

Rev Moatshe asked Treasury to explain why the land budget continued to decrease, rather than increase.

Ms Dlulane asked if there were sufficient funds to properly address each of the key challenges outlined in the presentation. It was imperative that government assist the emerging farmers.

Ms Masilo stated that the presentation did not mention scholar transport subsidies, especially whether they would be provided to rural farm schools.

Mr Mkhaliphi asked whether Parliament as policy maker could address the problem with the rapid depletion of the country's coal supply, because it was exporting coal "like it was going out of fashion".

The meeting was adjourned.

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