Financial & Fiscal Commission Recommendations on Division of Revenue Act 2007/08: briefing

Meeting report

FINANCE SELECT COMMITTEE
17 MAY 2006
FINANCIAL & FISCAL COMMISSION RECOMMENDATIONS ON DIVISION OF REVENUE 2007/08: BRIEFING

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

Document handed out:
Financial and Fiscal Commission Submission on the Division of Revenue 2007/08: presentation
Financial and Fiscal Commission Submission on the Division of Revenue 2007/08

SUMMARY
The Financial and Fiscal Commission said that their recommendations for the division of revenue were a continuation of work that it had begun in 2004 with a review of inter-governmental fiscal relationships. There was a need for a comprehensive review of conditional grants. There had to be an analysis of how they functioned and of the conditions attached to the funds themselves. In health, the HIV/AIDS conditional grant should continue. There had to be a commitment to ensure sufficient focus and resources for addressing the problem. In agriculture, the Commission recommended that the Land Care and the Comprehensive Agriculture Support Programme Grants be merged due to overlapping objectives.

The Commission recommended that HIV Life Skills Education Programme Grant be continued. There was a need to focus the allocation mechanism on actual enrolment rather than using the education component in the Provincial Equitable Share. With the Health Professionals Training Development Grant, the organisational structure of the National Department of Health should include a unit with sufficient technical capacity. In the National Housing Allocation Formula, bias could be eliminated through the use of variables to account for provincial disabilities and peculiarities such as traditional housing, delivery capacity and developmental potential. With the Local Government Equitable Share Formula, the current estimated cost of R130 per person of delivering basic services had to be revised as the current figure was too low. The FFC recommended that the cost be raised to R175 per person.

The Commission noted the general progress by provinces since the implementation of the Provincial Tax Regulation Process Act of 2001. It also noted the general progress in the implementation of the National Treasury and Commission’s recommendations made in 2003 on own revenue collection and restructuring of Provincial Treasuries’ Revenue Directorates.

Members raised the issues of abolished cross-boundary municipalities and regular audits of implementing agencies.

MINUTES

Financial and Fiscal Commission (FFC) presentation

Mr Jaya Josie, the FFC Deputy Chairman said that their recommendations for the division of revenue were a continuation of work that the FFC had begun in 2004 with a review of inter-governmental fiscal relationships. This year the focus was on how conditional transfers operated and how their effectiveness could be improved.

Mr D Khumalo, Manager: Fiscal Policy and Analysis, said that there was a need for a comprehensive review of conditional grants. There had to be an analysis of how they functioned and of the conditions attached to the funds themselves. In this regard the FFC had a number of general recommendations. They wanted to reiterate that conditional grants should be used strictly to fund spill-over benefits and national priorities. They should then be phased into the equitable share after being institutionalised in provincial budget processes. National departments should set norms and standards for concurrent responsibility with performance monitored to ensure compliance with targets.

Mr Khumalo went on to explain some of the FFC’s specific recommendations. In health, the HIV/AIDS CG should continue. There had to be a commitment to ensure sufficient focus and resources for addressing the problem. This was consistent with the FFC’s position on the financing of HIV/AIDS. The Hospital Revitalisation Grant (HRG) should be incorporated into the Provincial Infrastructure Grant (PIG) as under-spending occurred due to stricter conditions and the preference of provinces for the PIG. This would ensure a convergence of purpose and would enable provinces to address health more comprehensively.

In agriculture, the FFC recommended that the Land Care and the Comprehensive Agriculture Support Programme Grants be merged due to overlapping objectives. The merge would reduce administrative burdens and provinces that depended on agriculture would spend according to their circumstances. In education, the conditions that related to the development and approval of business plans had to be refined and the time spent on plans and their submission by provinces had to be minimised.

The FFC recommended that the HIV Life Skills Education Programme Grant be continued. There was a need to focus the allocation mechanism on actual enrolment rather than using the education component in the Provincial Equitable Share (PES). The Municipal Infrastructure Grant (MIG) should go beyond funding the basic residential infrastructure, the public municipal service and social institutions and micro-enterprises, but should also cover operational and maintenance costs.

An allocation for the National Tertiary Services Grant (NTSG) based on approved policy norms and standards should be introduced. These norms and standards should be specified according to the types of beds; theatre; supporting staff; casualty; outpatients and staff ratio and non-staff cost per health care service. The Government should urgently develop a national service plan that included level one or primary/basic health care. The National Department of Health had to establish a Chief Directorate for technical assistance in administering the NTSG. Service redistribution could be achieved through separate capital accounts. The NTSG itself had to be retained as a CG and this would ensure that no unilateral downgrading of referral services as a part of a package of public sector services by provinces occurred.

With the Health Professionals Training Development Grant (HPTDG), the organisational structure of the National Department of Health should include a unit with sufficient technical capacity. A standing committee where all the role-players would make joint decisions on policy targets, inputs and funding flows should be established. Policy targets should be set and gazetted as minimum norms and standards for the funding of healthcare professionals. Funded institutions should also be externally audited annually. A national policy framework underpinning health professionals training should be developed with the allocation to the Department of Health being a CG. The allocation to the Department of Education should be an earmarked subsidy to tertiary education institutions. The HPTDG should be converted to a specific purpose grant based on target enrolment by the type of health professional. The allocation towards pathology students using National Health Laboratory Services should also be incorporated into the HPTDG.

In the National Housing Allocation Formula, bias could be eliminated through the use of variables to account for provincial disabilities and peculiarities such as traditional housing, delivery capacity and developmental potential. The formula was perceived as biased by rural provinces due to the non-inclusion of traditional housing, and the inclusion of the poverty component was seen to favour rapidly urbanising provinces. There had to be recognition of the variations in regional costs across provinces for houses of the same standard. Rural development funding for communities to access economic opportunities and a better livelihood had to be improved. Compliance with minimum quality standards for rapid housing delivery with no compromised quality had to be enhanced as poor quality impacted negatively on costs and backlogs. Demand and need was greater than what could be provided and increased funding would be limited by industry capacity and implementation constraints.

For welfare service financing, a social development component in PES based on population in poverty and institutional capacity had to be incorporated. This would improve simplicity and the maintenance of provincial discretion in delivery and ensure data collection on institutional capacity for proper financing. The reach of welfare services by accounting for the spread of institutions and human resources also had to be maximised.

With the Local Government Equitable Share Formula (LGESF), the current estimated cost of (R130) of delivering basic services had to be revised as the current figure was too low. The FFC recommended that the cost be raised to R175 as this would ensure that the grant would be directed at strengthening poor municipalities. Simulations had shown that under revenue neutrality, R175 allocated more to category A and B municipalities and raised the Local Equitable Share (LES) by R22 million.

To increase the effectiveness of the LES, a review and assessment of basic services costs would enhance the ability of the LES to achieve its principles and objectives. The review must consider differences in demographic disabilities and their composition. It must also consider regional and geographic disparities as they affect the quality and quantity of services.

The FFC noted the general progress by provinces since the implementation of the Provincial Tax Regulation Process Act of 2001. It also noted the general progress in the implementation of the National Treasury and FFC recommendations made in 2003 on own revenue collection and restructuring of Provincial Treasuries’ Revenue Directorates.

Discussion
The Chairperson of Gauteng's Standing Committee of Finance, Mr B Nkosi, asked if the FFC’s suggestions took into account the abolishment of cross-boundary municipalities.

Mr Khumalo replied that cross-boundary municipalities were dealt with in DORA and special provisions for the period of transition were included here. The FFC’s recommendations would factor these in.

The Chairperson of KwaZulu Natal's Standing Committee of Finance, Mr Xaba, asked what the implications of the removal of the cross-boundaries were on provincial budgets. The R175. What was the figure based on? Integrating the HRG into the PIG would reduce the importance of fixing hospitals. They had to be kept separate.

Mr Khumalo replied that adjustments were made to allocations since the boundaries were redrawn. The adjustments also took into account factors such as population and the state of the infrastructure. The amount of R175 per individual was based on a wide-ranging study where the FFC took a representative sample of all the provinces and based on the cost to municipalities to deliver basic services. Choices about how backlogs were dealt with were made by the province themselves. This meant that while hospitals were being revitalised, clinics might have been ignored. The FFC recommended integrating the HRG into the PIG to ensure that there was consistency and uniformity in how the infrastructure development occurred.

Mr M Goeieman (ANC, Northern Cape) said that it was important to factor in things like distance into the National Housing Grant. Which were the conditions attached to the grants that needed to be relaxed? Why was there a call for funded institutions to be audited annually only now? What had been happening all along?

Mr Khumalo replied that the FFC could have included any number of factors but it was important to factor in the most important ones, which were those that had the biggest impact. In the Northern Cape for example, there was a specific factor to deal with how large the province was and the large distances between its inhabitants. Conditions such as the monthly and quarterly reporting had implications for the capacity of the National Health Department and its ability to conduct effective monitoring. Maybe these requirements could be relaxed slightly. Monitoring took place, but what was needed was specific analysis of the factors involved, measured against the specific outcomes that were expected. That is, a more formalised audit process with better focus was needed.

The meeting was adjourned.