Financial and Fiscal Commission Recommendations

Meeting report

FINANCE SELECT COMMITTEE
7 June 2000
FINANCIAL AND FISCAL COMMISSION RECOMMENDATIONS

Documents handed out:
FFC Recommendations on MTEF 2001 to 2004 (available from the FFC website at http://www.ffc.co.za)
Preliminary Recommendations - A Costed Norms Approach - Consultation Document

MINUTES
Present from the Financial and Fiscal Commission was Mr Murphy Morobe (Chairperson) and Dr Hildegarde Fast. They presented the following document to the committee and a short discussion followed thereafter:

FINANCIAL AND FISCAL COMMISSION
RECOMMENDATIONS, 2001

- THE COSTED NORMS APPROACH -
AN INSTRUMENT FOR THE ALLOCATION OF FINANCIAL RESOURCES
For the next three-year MTEF cycle, starting in 2001, the FFC uses a costed norms approach to determine the allocation of national revenue between provinces.

"The costed norms approach is a formula based method for calculating the financial resources necessary for the provision of basic social service levels, given nationally mandated norms and standards."

What are the basic services?
The FFC applies the costed norms approach to the constitutionally mandated basic social services of: Basic education, Primary health care and Social security.

The costed norms approach is consistent with the obligation set out in the Constitution that: Each province and municipality is entitled to an equitable share of revenue raised nationally to enable it to provide basic social services and perform the functions allocated to it.

KEY AREAS OF FOCUS IN THE RECOMMENDATIONS for 2001
· The costed norms approach:
-Applied to the provincial sphere of government,
-Its implications for the Vertical Division of Revenue.

· The provincial equitable share:
- The (S) component: caters for basic education, primary health care and social security
- The Basic Element (B),
- The Institutional Element (I).

OTHER ISSUES
· Capital grants: FFC presents a conceptual model to quantify and overcome capital backlogs. For now, recommends a conditional grant

· Conditional grants: recommends that the status quo be maintained while research is ongoing.

· Local government: still undergoing transition and restructuring and changes in this regard should be delayed


Three broad steps in the implementation of the approach
Step 1
Constitutionally mandated basic level of social services should be determined nationally and should be expressed in terms of norms and standards for each programme area.

Step 2
Fiscal requirements should be determined by taking account of factors affecting provincial conditions and the macro-economic framework.

Step 3
Total costs of providing basic education, social security, and primary health care may then be calculated for each province

Advantages of the costed norms approach
· Formulas increase transparency, reliability, predictability
· Provides a more reliable estimate of revenue requirements for basic services and informs the debate around unfunded mandates
· The formulas contain flexible parameters to reflect "progressive realisation" of basic rights

Advantages of the approach
· Encourage responsible fiscal autonomy of provinces.
· Supports a formula-driven approach rather than discretionary grants to encourage consistency and fairness.

THE COSTED NORMS APPROACH AND THE VERTICAL DIVISION
The costed norms approach facilitates the political negotiations around the vertical division.
· It can provide a set of alternative benchmark norms, with each norm being costed.
· The consequences of budget changes for norms and standards can then be immediately calculated for each sector.
The trade-offs thereby become very clear and allow for better-informed negotiations.

APPLYING THE COSTED NORMS APPROACH TO THE SOCIAL SECTOR COMPONENTS:
Education
· Basic education is limited to ordinary school and special education; ABET, ECD and FET are provided for in the Basic (B) element.
· Learners are divided into nine groups by school type, household income and rural/urban residence
· The cost per learner in each group is estimated by assigning a weight to each group and multiplying by a per learner cost parameter which takes account of differences in educator remuneration per province.
· The total cost to a province is the average cost per learner multiplied by the number of learners enrolled in that province. A flexible policy parameter is included to deal with "inappropriate" age learners.

Issues arising from Education Minmec
Proposals are consistent with: 1) some Education Dept concerns and 2) existing funding norms.
· Education different from other basic services, "progressive realization" may not be readily applied because constitution prescribes basic education as a right for every child and adult.
· Need to rethink separation of education into personnel and non-personnel expenditures or the distinction between educator and non-educator expenditures.
· Use of learner educator ratio may send wrong messages.

Health
· The health formula relies on a tentative per capita cost for primary health care services.
· This per capita cost is multiplied by provincial populations that are weighted for age and gender to take into account differential utilisation norms.
· The provincial populations are also adjusted by poverty (poverty is a proxy for health need).
· Secondary health services are included in the Basic Element (B) of the equitable share

Issues arising from Health Minmec
· Consideration should be given to the introduction of a dedicated health facilities backlog grant.
· Greater incentives should be put in place to encourage public health facilities to collect own revenue.
· The formula for health should accommodate provincial incidence of HIV/AIDS and incidence of violence.
· Consideration should be given to the financial consequences of the devolution of certain health service responsibilities to local government.
· The formula for health should accommodate the impact of cross-boundary and cross-border flows of patients.

Welfare: Social security
· The formula for welfare relies on the costs for social security already defined by legislation.
· The provincial eligible populations for each of the social security grant types are multiplied by their entitlement amounts.
· An allocation for administration of social security is added
· A phase-in parameter is applied to ensure the move from the actual take-up rate to the total eligible population.

Issues arising from Welfare MinMec
· Proposals should relate to importance of social security rights being Constitutional.
· Average allocation for grants difficult to determine. Assumes the means test is easily applied.
· Policy phase-in parameters are too low, i.e. full take-up should be phased in faster.
· Percentage share for administration of social security inadequately costed.

THE REMAINING ELEMENTS OF THE PROVINCIAL FORMULA:
The Institutional Element (I)
· Is allocated to provinces to fund the provision of a basic administration and legislature.
· The FFC recommends as it did in 1996 that this element continue to be taken from the total provincial allocation.

The Basic Element (B)
· The purpose of the basic element:
1) allows provinces to deliver on their constitutional mandates.
2) provides provinces with budget flexibility.
3) supports the redistributive thrust of the general formula.

· The FFC recommends that the current Basic, Economic Activity, and Backlogs components be combined into one Basic Element (B).

· This should be distributed according to the percentage of households that fall below a predetermined income level.

Summary of the horizontal equitable share formula
Horizontal Division: PES = (E +W +H) + B + I + T
Where:
E = Basic Education,
W = Social security
H = Primary health care,
B = Combined basic,
I = Institutional
T = Tax capacity equalization.

Issues from Budget Council
· Danger of cost based approach becoming unaffordable with respect to choice of norms and standards (adverse incentives).
· Acknowledge the benefit of the approach as an analytical tool, despite data deficiencies
· Explanation needed for merging Economic Activity with Basic component.
Support development of Capital grants model, and willing to co-operate with FFC.
_____________________________________________________________

WHAT IS THE FINANCIAL AND FISCAL COMMISSION?
The role, function and powers of the Commission are determined by:
· The Constitution,
· The Financial and Fiscal Commission Act, and
· The Intergovernmental Fiscal Relations Act.

WHAT IS THE COMMISSION'S KEY FUNCTION?
The commission must consider:
· The annual vertical division of revenue between the national, provincial and local spheres,
and recommend on:
· The horizontal division of revenue between the provinces, and
· Any other
- Conditional allocations or
- Unconditional allocations to provinces or Local Government.

The FFC's role and Policy making
· The FFC does not make policies, neither does it determine norms and standards; this is the role of government
· The FFC's role is essentially to provide recommendations with respect to:
-the financial implications of new policies, and
-to develop the instruments by which financial resources are allocated to resource the delivery of these policies.

Discussion
Mr Durr (ACDP) raised the concern that the FFC was busy dealing with the redistribution of wealth. Had they ever considered the creation of wealth.

In response, Mr Morobe replied that there was no express requirement in legislation for the FFC to devise means of creating wealth. He stressed that the FFC does not make policy; their functions are limited to national revenue raising and equitable sharing of this revenue nationally, provincially and locally.

Mr Marais (ANC) asked why HIV/AIDS was not factored into the equitable share formula when working out the costed norms approach

Mr Morobe replied that AIDS was a national problem and is therefore not incorporated into the horizontal equitable formula. It needs special attention since it impacts on every sector of the economy.

Ms Fubbs (ANC) asked what kind and level of data will be required to enforce the costed norms approach, and also the cost involved.

Mr Morobe replied that the FFC was working in collaboration with Statistics SA to collate data. They had also gone out on their own to collect primary data such as counting the number of underprivileged children in rural schools.

Mr Theron (DP) asked for the FFC's viewpoint on the under-funding of local government.

Dr Fast explained that provinces are dependent for 95% of their funding on national government. Local governments are self-financing for 95%. She stressed that the revenue instruments available to local government are not the same as those of provincial government. It is also quite difficult to assess the situation of local governments with the demarcation process still in motion.

The Chairperson ( Ms D Mahlangu) asked how authentic the data being used by the FFC was, and what were the differences between the costed norms approach and the approach being used currently

Mr Morobe pointed out that the current formula is focused on input costs such as learner costs and teachers' salaries. The FFC formula is focused on performance and outputs. The information used by the FFC in concluding their findings was very reliable since they work in co-operation with institutions like Statistics SA and Independent Electoral Commission.

The meeting was concluded.