Financial & Fiscal Commission Recommendations on Equitable Share

Meeting report

FINANCE PORTFOLIO COMMITTEE
18 August 2000
FINANCIAL AND FISCAL COMMISSION RECOMMENDATIONS ON THE EQUITABLE SHARE

Relevant presentations
Financial And Fiscal Commission presentation (See Appendix 1)
Financial & Fiscal Commission Recommendations: 2001 - 2004 MTEF Cycle [e-mail [email protected] if this document takes too long to download]
IDASA submission on the FFC's recommendations
UCT School of Economics submission (written document not distributed)

SUMMARY
The purpose of the costed norms approach is to ensure that the national revenue be equitably shared in terms of the horizontal division. The approach works around the context of the problems that have been encountered by provinces.

The Financial and Fiscal Commission acknowledged the difficulty of the approach in respect of data availability but they contend that the approach can be fully implemented in 2002.

The general response of the committee was that the approach does not seem able to be implemented in light of the intensive data that it requires. It is limited to a horizontal, provincial perspective and does not look at the vertical division of revenue, particularly local government level.

MINUTES
Financial And Fiscal Commission presentation
A delegation from the FFC including the Deputy Chairperson of the FFC, Mr J Josie, was present.
The FFC recommendations are:
- constitutionally mandated basic levels of social service should be included in the provincial equitable share. The provinces should be held accountable for the delivery of these services.
- each province should also receive a B Element (basic element) for the provision of services not included in the constitutionally mandated basic services. This covers a range of issues where provinces have a discretion. Some monitoring should take place. The current basic, economic activity, and backlogs component should be combined into one basic element.
- provinces should be allocated an I Element (institutional element) to fund basic administration. This should be lower than the current allocation. The remainder should be directed to other elements.
- national conditional grants should be made available to provinces to take care of the social infrastructure backlogs.

The purpose of the costed norms approach is to ensure that the national revenue be equitably shared. They are looking at the horizontal division of revenue but the costed norms approach can also act as a tool to facilitate political discussion around the vertical division of revenue.

The approach works around the context of the problems encountered by provinces.
In education for example the differences in resource needs for learners have to be considered. The question to be asked is what outcomes are expected and what measures can be used to see if the delivery is effective. For example is the matric pass rate the only way to determine the success of the education system. They are not happy with this measure. They have looked at socio-economic conditions to see what different learners required.

The FFC believes that the costed norms approach is the bridge between constitutional obligations and budget decisions. While they recognise the difficulty of the approach in respect of data availability they believe that the approach can be implemented at this time together with the current formula, and then fully implemented in 2002.

IDASA's presentation
Mr Albert van Zyl's general criticism of the FFC's approach was that:
- There are problems with input information.
- There is a lack of clear norms and standards. For example in the area of health, what level of health care should be provided?
- Cost norms is an incentive to provinces to inflate their costs to get additional funds. To counter this shortcoming the FFC have made a distinction between avoidable and unavoidable expenditure. However it is difficult to make a distinction between what is avoidable expenditure and what is not.
- If one costs norms so specifically then that may be a temptation to some provinces to keep the poor out of the provinces. It will have the effect of excluding people from service delivery in certain provinces.

Mr van Zyl examined the FFC's recommendations in the Welfare, Health and Education sectors and made various recommendations. He also looked at the Other Component and suggested that they retain economic activity component and amalgamate the basic and the backlog components (as opposed to the FFC's recommendation to reduce the institutional component and to amalgamate economic activity, basic and backlog). This, he said, would allow the basic component to regain its redistributive basis.

UCT School of Economics
Ms Amanda Kitching gave a critique of the FFC's recommendations:
- The FFC acknowledges that there is a practical difficulty in the costed norms approach. There is no accurate data, no certainty or predictability, and no accurate policies.
- Why change from the present position? Provinces may not be in a better position with the new complicated formula. They could end up getting the same amount.
- The FFC contends that norms and the MTEF will be brought into alignment. How is this to be done? Norms are the result of a socio-political process. The MTEF is the result of a budgetary process. The two are defined in different parameters therefore they are never aligned.
- The FFC further contends that the costed norms approach will encourage efficient resource allocation in the provincial budget. How will this be done? Provinces spend approximately 80% of their budget on the Big Three (health, education and welfare). Costed norms place a condition on the equitable share. Linking norms and standards with efficient allocation is a judgement call.
- It supports IDASA's point that the economic activity variable in the formula must be retained. They are not punishing the provinces without economic activity. They are simply acknowledging the differences. Raise the standard of the lowest provinces, do not drag the top down.
- Why change the way that backlogs are being funded. In any event money earmarked for backlogs is currently not being spent on backlogs.

Discussion
Dr Rabie (NNP) asked how they could apply the cost norms approach in the absence of empirical data. He said that it did not make sense.

Mr Josie of the FFC said that they cannot vouch for the accuracy of census data and acknowledged that this needs improvement. He said that they ''take the point''. He added that data affects all formulas, even the Department of Finance's formula. They are meeting with Stats SA, the Department of Finance and other stakeholders to see what they need to do to obtain the necessary data.

Ms Kitching suggested that they should move away from something that requires intensive data. The costed norms approach with intricate detailed data will exacerbate the problem.

Mr van Zyl replied to this that it is a SA disease to say that there is ''no data''. They should specify what data they do not have. There should be a link between input and output.

The Chairperson said that costed norms require minute analysis. If they intend to move beyond education, health and welfare then this will become a massive exercise. As a developing economy, to what extent can South Africa do this?

The FFC said that the question is what sort of data should they collect. For example, is the matric pass rate the best way to determine the success of the education system? Therefore one must:
- define the success of delivery of services,
- then see what inputs are required,
- and then define them.
They must collect the data to achieve that objective.
The current norms in education for example shows a serious level of disaggregation.

The FFC continued that arguing "why change the current system" is simply fear of change. The task is not insurmountable.

Mr Andrew (DP) said that the FFC is an important structure and if the costed norms approach were implementable then it would be the logical approach. He added that such an approach applied to the vertical division is a long way off.

The Chairperson asked if they can realistically implement this approach without a data base. Are the norms in place agreed to by government. How is government going to deal with these recommendations in light of the inaccurate data and the fact that there is no full list of norms.

Mr Josie replied that the Big Three departments have a list of norms and standards, therefore the FFC opted for them first. They are not saying that government should put in place more money but that the money should be used more effectively. Mr Josie said that the emphasis of costed norms approach was not the cost. Government picks the norm. They then find data about that norm. The norm informs the data. They are costing the norm.

He agreed with Mr Andrew's statement that costed norms for the vertical division is a long way off.

After tea break, Dr Fast (FFC) tried to clarify the data verification issue by pointing out that the FFC had refined the equitable share formula using existing data, and once the new MTEF allocations were received, additional data will be obtained to improve on the current formula. She further stated that the committee should not be tempted to maintain the status quo, adding that until better data is generated provinces will continue to suffer.

The Chairperson raised the concern that one of the major stumbling blocks facing the FFC when making its recommendations, was the absence of national norms and standards, and how then could the costed-norms approach be effective in the absence of such standards

Mr Josie replied that task teams would be established between the FFC and the Departments of Education, Health and Welfare to look into the formation of acceptable norms and standards. These task teams will also determine criteria for equalisation grants.

Mr van Zyl (IDASA) highlighted the point that both welfare and education departments had input norms that are not reflected in the costed-norms approach

The Chairperson felt that the embryonic stage of the costed-norms approach left the committee with a dilemma of how to implement such a process, and further the modifications recommended by IDASA also had to be taken into account. She stated that the document presented by the FFC only addressed the horizontal division of revenue, whereas it is supposed to address both the vertical and horizontal divisions. She was therefore confused as to how the FFC could only select certain constitutionally mandated functions and ignore others.

Mr Josie replied by saying that in drawing up their recommendations they had followed guidelines as set out by the Intergovernmental Fiscal Relations Act, and the FFC had actually discussed an approach concerning the vertical division of revenue, but no approach seemed feasible with the given information in the hands of the FFC. He stressed that the FFC's approach in quantifying certain aspects of the horizontal approach was not an attempt to crowd out other functions. He added that much research needed to be done concerning the vertical division of revenue, since it also dealt with the issue of sources of revenue

The Chairperson said that the FFC is required to be consulted and their recommendations considered. She said that the FFC has a very important role as an independent body in the budgetary process. She feared however that the FFC may have become the custodian of certain aspects of the budgetary process, and this is evident in costed-norms approach, which is very limited to a provincial perspective. The local government- level focus was very absent in their document.

Mr Josie (FFC) agreed to what the Chairperson had said, stating that the FFC had a responsibility to all three spheres of government, and by May of next year full recommendations on local government and the vertical division of revenue would be made.

Dr Fast (FFC) added that in terms of local government, the FFC had held forums with SALGA and the budget council. Essentially because of the current major restructuring of local government in terms of demarcation and their sources of revenue, the FFC felt that they would deal with it at a later stage

Mr Booi (ANC) made a plea to Ms Fitchen from UCT to make a written input of her findings

Mr Andrew (DP) raised the issue that some of the FFC's recommendations were analytical tools which they were recommending to the Department of Finance and some of them were actual recommendations with regard to the division of revenue only. He asked if the FFC could not submit specific recommendations concerning the division of revenue only, without the analytical processes recommended to the department

The Chairperson suggested that a meeting be organised with the FFC, since it was very difficult to respond to a document which deals partially with some issues. Mr Booi (ANC) seconded this point

In conclusion, the Chairperson said that the costed-norms approach is valuable in establishing norms and standards that are often neglected in the budgetary process.

FINANCIAL AND FISCAL COMMISSION
EQUITABLE SHARE
RECOMMENDATIONS, 2001
18 August 2000

SUMMARY OF FINAL RECOMMENDATIONS
· The provincial equitable share should provide for constitutionally mandated basic levels of social service provision, and provinces should be held accountable for the delivery of such services;
- The FFC has used the costed norms approach in arriving at the formulae for basic education, welfare and health services;
- Each province should be allocated a Basic (B) Element, which will include the provision of services not defined as constitutionally mandated basic services;
- Each province should be allocated an Institutional Element set equal to the minimum cost of operating government institutions;
- In view of urgent need, national conditional grants should be allocated to provinces to support the reduction of social infrastructure backlogs.

Final Recommendations differ from Preliminary
· In education, learner/educator ratios have been replaced by relative need weights;
· In health, primary health care services are costed,
· For welfare the costed norms approach is applied to social security,
· The Basic element incorporates the education, health and welfare programs not costed in the "S" element.

WHY USE THE COSTED NORMS APPROACH FOR THE "S" GRANT?
· Provides a basis for objective formulae to determine minimum amount of money a province needs to ensure delivery of basic social services,
· Facilitates reconciliation of decisions on budgets with service delivery to ensure accountability,
· Recognises the different resource needs of different provinces, but maintains a province's budget-making competency,
· Provides for the allocation of resources in a transparent manner, and
· Formula allows for flexibility and responsiveness to policy needs.

THE VERTICAL DIVISION AND THE COSTED NORMS APPROACH
The costed norms approach as a tool facilitates and assists political discussions around the vertical division.
· It can provide a set of alternative benchmark norms, with each norm being costed.
· It provides for the consequences of budget changes for norms and standards to be assessed easily and calculated immediately for each sector.
- Trade-offs become clearer,
- Allows for better-informed decisions.

ISSUES IN IMPLEMENTATION
1. Expressing nationally mandated basic service levels in terms of norms and standards
2. Consideration of factors beyond control of provinces and their effects on fiscal requirements
3. Total costs of providing basic education, social security, and primary health care chosen as key drivers of provincial budgets

APPLICATION OF THE COSTED NORMS APPROACH TO THE S COMPONENTS:
Education, health & welfare
· Basic Education: Differences in resource needs for learners with different characteristics are taken into account,
· Health: The health formula relies on a tentative per capita cost for primary health care services, and accounts for differences in utilisation rates
· Welfare: formula relies on the costs for social security as defined by legislation and proposes phase-in parameters towards full take-up.

THE REMAINING ELEMENTS OF THE PROVINCIAL FORMULA
THE INSTITUTIONAL ELEMENT
· Is allocated to provinces to fund the provision of a basic administration and legislature.
· The FFC recommends that this element continue to be taken from the total provincial allocation.
· It should be lower than currently is the case with the remainder directed to other elements.

THE BASIC ELEMENT
· The purpose of the basic element is to:
1) give provinces the ability to deliver on other constitutional mandates.
2) provide provinces with budget flexibility.
3) support the redistributive thrust of the formula.
· The FFC recommends that the current basic, economic activity, and backlogs components be combined into one basic element.

CONDITIONAL GRANT FOR CAPITAL BACKLOGS
· A capital model is being developed to supplement provinces' capital spending through the use of a conditional grant from national government.
· Two components of the grant will compensate provinces for (a) their inherited social backlogs, and (b) their (on-going) social infrastructure needs.

Summary of Equitable share formula
PES = (E + H + W) + B + I +T
Where:
E = Basic Education,
W = Social security,
H = Primary health care,
B = Combined Basic Element,
I = Institutional,
T = Fiscal Capacity (set at zero)

CONSULTATION ON RECOMMENDATIONS
· FFC has consulted widely including:
- Portfolio and Select Committees at Parliament
- MinMecs; education, finance, health and welfare
- Heads of line departments
- Executive Councils of provinces
- NGO's & CBO's
· Responses to date have been favorable, but with issues around implementation raised.

CLARIFICATION IN RESPONSE TO SOME ISSUES RAISED IMPLEMENTATION ISSUES
· FFC argues that implementation starts with basic services first.
· Concerns about data quality are common for the existing and proposed formula.
· Refinement of norms and standards will occur over time, and also of cost factors.
· Progressive realisation of rights and entitlements as fiscal circumstances permit (Constitutional provision)
· Certain elements not yet included in "S" transfers, but are in the "B" element.

WORK IN PROGRESS AND FFC PROJECT 2002 PLAN
· Need to apply MTEF resource allocations using the FFC formulae and model,
· Refine use of the costed norms approach as it applies to the social sector
· Examine local government financing issues
· Further elaboration of capital/infrastructure funding model
· Further examination of issues around the potential expansion of provincial revenue sources, including its implications for provincial borrowing

Summary
· FFC appreciates that its recommendations engendered substantive & constructive debate
· FFC believes the costed norms approach facilitates the reconciliation between the constitutional obligations and budget decisions
· Finally, the FFC recognises the limitations of its approach given the data availability and the "state of the art" of application of a costed norms approach.
· However, FFC believes that the costed norms approach can add value immediately and that it must be improved upon over time

IMPLEMENTATION
· The FFC believes that the costed norms approach can be implemented side by side with the current formula and fully implemented in 2002
· The Parliamentary Committee could request the results of the costed norms approach formula as applied to the MTEF