Intergovernmental Fiscal Review 2001: committee report

- One of the most critical obstacles is the double allocation of houses.
- Lack of co-ordination across the sphere of government and sectors.
- Fraud and corruption should be addressed in the allocation of houses.

2.5. Health

2.5.1 Primary health care budget:
The Conditions in Clinics for primary health are not of the standards that government has expected. The principles of Batho Pele are not adhered to with patients being treated without the quality of care contained in these principles. Care must be taken to ensure that patients' rights are not trampled upon. The minister of health appealed to all parties in all provinces play the necessary oversight and monitoring role to ensure that the rights and principles contained in the Patients Rights Charter are protected and adhered to thereby ensuring that patients are treated with care.

2.5.2 Hospital Reconstruction and Rehabilitation.
Currently income generated by hospitals are not retained by hospitals but revert back to treasury. Maintenance funds should not be transferred to Public Works, but the department of Health. The department of health relies almost exclusively on the department of public works to maintain health facilities. This handicaps the department of health who has to rely on the programme of public works before necessary upgrades and repairs can be done. Provinces have appealed that this should be reviewed and that maintenance and upgrades should be the responsibility of the department of Health and not Public Works. Some hospitals are under severe pressure because of infrastructural problems because infrastructure is not properly maintained.

Provinces have developed the ability to spend and procurement takes six months so it is crucial that provinces have medium to long-term plans for reconstruction and rehabilitation plans. However all of these plans need an indication from Treasury if province will be eligible for money.

The minister encouraged provinces to examine private/public partnerships to fund priority projects.

2.5.3 Recruitment and Retention of Skilled personnel:
The legacy of apartheid still manifests itself in the skewed distribution of professionals in the country. The emigration of young professionals is a major cause of concern. They cite the increase in crime as a reason for leaving, however crime is a global phenomenon.

The enticement offered by other countries is a universal experience. The quality of training in South Africa is very high so countries like England offer package deals to potential emigrants in the hopes of enticing them to England. South African professionals should follow the example set by Cuban doctors deployed to the remote rural areas of our country who display a sense of duty and commitment to their own country and also to ours.

The Minister and some of the provinces thought that it was important that the Minister of health offer incentives to both community doctors and those who have been around for a while to encourage equity between provinces. Because rural provinces experience difficulties in retaining doctors both the Minister and the MEC's appealed to these people to develop a sense of patriotism and consciousness so that they could give back to the communities what they had learned.

The spread of doctors across the country favour those provinces with a large urban areas leaving the rural provinces with a skewed patient to doctor ratio. The rural provinces have doctor to patient ratios that are well below the requirements of the world health organisation requirement for developing countries. Need to development a sense of patriotism coupled with incentives

2.5.4 Human Resources Development Programme:
Leg and rank promotions have presented enormous constraints on provincial budgets. Already personnel expenditure is a very large percentage of the budget. The department needs to examine if the high cost for personnel is justified in terms of value for money. And on the flip side, are staff members encouraged to stay because salaries are market related. The health sector has reported that they experienced loss of key posts.

The employment of Chief Finance Officers has helped provinces to manage better fiscal discipline. Some rural provinces would not have been able to cope with the demands for doctors had it not been for the departments policy of Community Service and use of foreign doctors. The minister is speaking to Treasury to retain incentives without perverse taxation liabilities,

2.6. Local Government
South African Local government has been undergoing some profound changes in the past years. Transformation at local government has happened in several ways e.g. financially, institutionally and developmentally. Municipalities are playing an increasingly important role in service delivery, eradication of poverty and improving the social and economic conditions of South Africans. Many new functions are being decentralized to local government, giving municipalities a more integrated package of services and functions to manage. A major fiscal challenge is to support these roles through effective revenue mechanisms.

Together with the White Paper on Local Government, the Municipal Demarcation Act, the Municipal Structures Act and the Municipal Systems Bill are the building blocks, which have created the vision and the way forward for the post-transitional local governance.

This system of governance is based on:

- Working with local citizens and communities to find sustainable ways to meet their needs and improve the qualities of their lives;

- Finding new ways to accelerate and sustain the delivery of services, particularly to the poor.

The Intergovernmental Fiscal Review therefore provides an important step in looking at the effectiveness of and efficiency of resources applied in different spheres of governance so as to make sure that, transformation does take place. It also highlights the following fiscal realities that need to be considered and addressed to secure the sustainability of transformation:

- Demarcation has created 284 new municipalities, each of which now has to amalgamate staff from previous structures, refocus strategic plans and budgets and align themselves organizationally to new roles. The shifting functions and changes to boundaries have distinct financial and personnel implications.

- In line with the constitution, many national and provincial departments are considering which of their functions are best performed in the local sphere. Functions under review include housing delivery, primary health care and the district health system, water and municipal policing. Personnel and financial implications must be considered before deciding on such decentralization.
- The transfer, movement and placement of staff in newly amalgamated municipalities have added upward pressure to equalize salary and other employer benefits. Already personnel costs have been the foremost cost driver for municipalities in recent years. This affects the scope to expand service delivery as budgets come under pressure.
- The major urban municipalities have distinct revenue generating powers and are only marginally dependant on transfers from national government. Many rural and smaller urban municipalities however have much weaker fiscal capacity and depend considerably on transfers from national government. Government's commitment to assist in the provision of free basic services requires implementation of focused and targeted fiscal and other programmes in all spheres of government. This does not however alleviate the need for improved financial management locally and for municipalities to spend within their budgets and collect revenue due.
- Local government budget information is often not reliable and is currently fragmented as the newly demarcated municipalities are amalgamating. Outdated budgeting systems and inconsistent accounting or budgeting practices and systems translate into poor recording of data and inaccurate planning and make benchmarking, comparisons and tracking of funding flows difficult.
- Affordability is a major issue and the situation has been aggravated by ongoing increases in bulk prices (e.g. electricity and water) that ultimately are passed onto municipalities and their consumers. For example, the government has contributed to more than 1,1 million housing opportunities since 1994 and provided many social and basic services, but the beneficiaries can often not afford municipal service charges.
- The impact of AIDS/HIV is becoming more visible and is likely to be severely impacting in the provincial and local spheres.
- Although budgeting on the expectation of collecting all their revenue, many municipalities do not collect a significant portion of revenue due. This results in deficits at the end of the financial year, undermining the financial stability of municipalities.
- Capital spending has been declining as a percentage of total spending. High personnel spending means less is available for service delivery and capital development.
- Net private lending to the municipalities has remained virtually flat for at least four years. Investors have also had doubts about the financial viability of municipalities in transition and about the legal regime related to municipal debt. DBSA and INCA currently dominate the market.
- Local government budgets often show clear intent to address backlogs and poverty alleviation, but poor spending capacity often results in these intentions not being realized. This is particularly true of poorer provinces and weaker municipalities.

2.6.2 Municipal transformation challenges

(i) Cross border problem
The existence of cross border municipalities is the outcome of the recent demarcation process of local government institutions. The boundaries extend to more than one province thus causing problems as to which municipality is accountable.

(ii) Service Delivery
Municipalities face a range of competing pressures on resources available for service delivery. Reforms to municipal planning and budgeting processes are being introduced to assist municipalities to make these trade offs on the basis of clear policy priorities and local context.

The key trade off required is the relative importance attached to service quality and equity objectives. On the one hand, municipalities must maximize resources available to expand and sustain access for the poor households. However, non-poor consumers also demand improvements in the quality of services to which they already have access. These consumers provide the economic base of a municipality and thus continue contribute significantly to its revenue. Declining service quality is likely to undermine both local economic performance and payment morality, thus jeopardizing the effective tax base of a municipality and its ability to pursue equity objectives.

As with other spheres of government, resources available to meet these pressures are limited in the short term. This highlights efforts to effect medium to long-term adjustments to expenditure pressures facing municipalities.

The importance of establishing effective local government in rural areas cannot be overstated. In these areas, the absence of formally planned settlements means that revenue generation potential is low, institutions weak and service provision differently structured and priced. The local revenue sources are limited and do not adequately cover basic administrative requirements. During the current year, these municipalities have also been affected by uncertainties associated with the transition and funding of free basic services. This situation is under review at ministerial level.

(iii) Expenditure Pressures
(a) Personnel Challenges: Municipalities employ in total over 200000 people: about 109000 in category B municipalities and 8000 in district councils. Despite concerns that the large share of personnel threaten to squeeze out service delivery, salaries continue to make up the largest share of municipal expenditure and continue to rise faster than inflation.
(b) Shifts in municipal powers and functions:
- Powers and functions of non-metropolitan municipalities: The shifting of powers and functions between categories of non-metropolitan municipalities, either through demarcation or sectoral policy reforms, is a significant challenge.

- Decentralization or devolution of functions to municipalities: Restructuring of service delivery is also under consideration in various sectors, with likely implications for municipalities. Proposed initiatives to transfer water services, devolve health functions and regionalize electricity distribution could fundamentally alter the role of municipalities with associated implications for staffing and expenditure needs.

- Free basic services: The challenges of municipal service delivery are broader than the commitment to free basic services alone. These services are critical inputs to local economic activity and thus national economic growth and development.

(d) Allocating subsidies efficiency: The efficiency with which services and subsidy resources are allocated among households has a significant impact on the total cost of service delivery. The challenge is foremost to ensure that poor households are primary beneficiaries of the free service policy and associated resources.

(e) Bulk Supply Costs: Price increases for bulk service purchases by municipalities have placed pressure on municipalities, as they cannot always pass higher bulk of costs on to consumers without experiencing a rise in non payment levels, political resistance or lower demand for services.

(iv) Transitional Costs associated with amalgamation
Transitional costs associated with amalgamation: Amalgamating former municipalities involves some complex issues, such as consolidating assets and liabilities on a single balance sheet and balancing extended service provision with levying of taxes, fees and charges across diverse communities. Vastly increased property rates and service charges could affect the affordability of services, particularly for poor households.

2.6.3 Intergovernmental Fiscal Review Hearing on Local Government

I. Key issues discussed
(i) Department of local Government
The government's priority of transforming society was expressed. The commitment to improve the lives of people was also reassured. The Deputy Minister stressed the importance of the budget used as a tool to address the legacies of the apartheid. She reaffirmed the importance of reforming the budget, because the way in which the system of local government was structured in the past was such that it catered for the best interest of the minority at the expense of the majority. Thus, there was and there still is the need for restructuring. She highlighted some of the consequences of the past apartheid legacy, namely, backlogs, poverty in the rural areas, urbanization etc.

The following concerns were expressed:
- That some of the critical pressures are on expenditure as it is felt that it is spent more on personnel. The minister expressed that there is a need for more efficient, effective and accountable personnel for implementation but a balance has to be stricken between the expenditure on personnel and the governments commitments to service delivery. Therefore, in determining the budget, the two have to be weighed.

- The importance of investment in the rural areas.
- The clarification of the functions and powers of district and local municipalities to assist planning and budgeting and to create certainty for investors.
- Grants need to be coordinated and better targeted.
- A distinct clarification of the role of Traditional leaders and municipalities, as there have been reports of overlapses and clashes, which have caused problems in some of the provinces.
- That, an empirical study in each municipality is being conducted to look at their financial structure to assist in the budget allocation. People involved include, Departments, Provinces, FFC, demarcation boards.
- There are also certain functions passed by the national governments on local governments but they are not followed by finances.
- That, local government plays an important role in the delivery of basic services especially with regards to free basic service. This area requires adequate financing.
- The most impoverished areas at the moment are the Northern Province and the Eastern Cape. The need for sufficient funds allocated in the impoverished provinces was expressed. What is crutial is that delivery should be able to provide services in an integrated setup. The measuring inequalities present the greatest ongoing challenge.
- Provisions like electricity be accompanied with finances for infrastructure. Not all areas can get private sector participation. A problem of loans by the Development Bank and INCA to larger municipalities was expressed.
- That municipalities must develop credible IDPs that link to their budgets and that take available resources into account. IDPs should be used to determine backlogs.
- Cross boundary issues are becoming a problem.
- The need to accelerate budget reform was expressed. With regards to the Budget reform, no final plans have been made. Probably be done by 2002 March. Not an easy process as some councils are still new and others new to this area. The fact that Reform takes time was expressed. They are looking at a period between 5-10 years.
- The need for use of information technology in collecting data so as to minimize the inaccurate data. The programme that is envisaged at the moment is networking forum.
- There was concern expressed with regards to the Regulation council. It was proposed that the Revenue Collection System be improved to look at monitoring people to pay services. It was acknowledged that the main reason that people do not pay for services is poverty.
- Upgrading of services and the quality of services was expressed but that also needs funding.
- The Department is concerned about the decrease in spending on capital infrastrure in municipalities. This can affect delivery of service. The uniform approach to budge is important.
- With regards to equitable share, there has been some increase but it is not enough. Ideally it should be used for the provision of delivery of basic services. Now it is used for personnel expenditure.
- Rationalization of transfers. Transfers are being consolidated to ensure that they effectively support a municipal sphere that serves communities best and that addresses the needs of the poor. The report shows that however, many transformation issues require very careful consideration to ensure that the new structures are fiscally sustainable.

(ii) Department of Water Affairs
The Minister highlighted the following areas of provincial and local government as areas in which they work:

- Waste management and control over water pollution;
- Support to irrigation farming;
- Conservation forestry;
- The Department's Working for Water Programme is essentially a focused nature conservation programme and nature conservation is a concurrent function with the provinces;
- Water supply;
- Sanitation service provision.

The following were identified as areas in which the department of Water Affairs works with Department of Local government.
- Providing basic funds for basic needs water schemes.
- Operating water sanitation schemes where local government is not yet willing or able to take them over.
- Establishing a family of regional utilities, water boards, multi jurisdictional service providers to provide services where local government does not want to provide the service itself.
- Training capacity building for local government at the levels of councilor, official, technician and artisan.

The following concerns were raised:
- That the review's focus is on urban municipalities where the bulk of expenditure occurs rather than on the rural and district system where the major challenges of service delivery and poverty eradication are located.
- That revenue generation potential in the rural areas where majority of the people reside is low, institutions are weak and service provision is generally both more complex and more costly as a result of the absence of formally planned settlements.
- That the funding available to municipalities serving such communities is limited and does not adequately cover their basic administrative requirements. As a result funding intended for this purpose is used for other purposes.
- That these municipalities have been affected by uncertainties about the mechanisms for the allocation of the equitable share.
- The report does not recognize the importance of directing resources towards building up local government as a sphere of governance. The vertical split of nationally revenue raised is as follows: National Government (R84,3b), Provincial Government (R117,4 b) and Local Government (R6,5b). To expect local government to both become properly established and to function as the key developmental wing of government requires resources on a larger scale. The equitable share (R3,4b), infrastructure grants (R2.4b) and current transfers (R0,6b) need to be doubled to address the transformation needs of local government.

2.6.4 Cross-sectoral issues in the provinces
Many of the issues that provinces and local governments face transcend sectors and departments. This section of the report focuses on these more general issues.

2.6.4.1 Integrated Development Strategy
The crucial element of any integrated strategy is that while co-operation is required within the social sectors, coordination amongst the different spheres of government is equally necessary. There has to be both vertical (across sectors) and horizontal (across spheres) co-ordinations simultaneously. This is the most daunting task confronting any government in transition and no blue print exists for such undertaking. I

2.6.4.2 Public-Private Partnership (PPP)
The PPPs are dependent on at least three conditions:
An operational need for private sector skills to deliver the service
An identifiable market of private sector bidders prepared to compete for the project
Appropriate allocation of risks

In order for PPPs to be approved by the relevant Treasury, they must demonstrate:
Affordability
Value-for-money
Transfer of appropriate financial, technical and operational risk to the private party

2.6.4.3 Beneficiaries of social security grants and bank charges
Members of the Select Committees were concerned that poor beneficiaries of social securities are still burdened with bank charges if their social grants are collected from the conventional banking sector.

2.6.4.4 Redistribution of personnel to rural areas
For example in the health sector, although the extension of primary health care has made basic health care more accessible to all South Africans, significant inequity remains. Private health care system only allows access to less than 25% of all South Africans. With less funding the public sector has to care for a much larger number of people than the private sector. The Review tells us that the distribution of all health professionals - doctors, specialist, dentists and nurses is highly uneven across provinces and between urban and rural areas. The 2001 Review tell us that just over 50 percent of fixed clinics, 46 percent of satellites and 69 percent of mobile clinics serve rural areas.

2.6.4.5 Maintenance of existing infrastructure:
There can be little argument against the maintenance of existing infrastructure. There is also a general believe that it would make economically more sense to invest in the maintenance of existing infrastructure and to do so immediately when deterioration is first detected. A delay in response to the deterioration of infrastructure will only increase the economic costs of maintaining such infrastructure.

It may also cancel out some of the benefits government sought to give previously disadvantaged communities through the many infrastructural development initiatives it implemented in terms of the RDP. The maintenance of these infrastructural development programmes is essential if previously disadvantaged communities are to continue benefiting from those developments.
Recommendations
With regard to local government, the Select Committee on Finance argues that while the 2001 Review provides useful material on past municipal budgets, the focus from next year on will shift to the post-demarcation bodies.

The Select Committee on Finance would recommend the following for the future issues of the Intergovernmental Fiscal Review:
- Future reviews should include data for the newly amalgamated municipalities with a greater focus on non-financial performance measures to help gauge efforts to address the service delivery goals.

- The Review should continue to be developed as a source of information on progress with reforms, such as service delivery, systems reform and redistribution in the local sphere. As this year's shows, priorities are:

- A national study with regard to the subsidization of the poor over and above the concept of free basic services for all, be undertaken within all municipalities to determine the extent thereof.

- While a significant amount of cost is funded through local taxes, a vast number of municipalities do not have adequate tax bases to address these challenges. SALGA is of the view that an alternate source of revenue be identified to finance the gaps in social and economic development.

- The equitable share must be increased to make provision for allocation to District Municipalities.
With regards to the transport sector the Select Committee on Finance recommends the following:

- A more detailed study should be undertaken by the Department of Transport to assess what is the maximum load permissible on our roads. Excess roads do damage road surface and South Africa has the second highest maximum loads permissible in the SADC region;
- The appropriate Select committee should assess what progress has Department of Transport made establishing new institutional arrangements for roads development. The real issue is whether our institutional arrangements are appropriate to ensure that money budgeted for roads are actually spent!
- Approach the National Treasury for a written comment on the slowness of cash flows during the disaster period;
- Attempt a follow-up with the transport department on their progress to reform the bus subsidy programmes;
- If other modes of transport (such as bicycles and rail) are priority, then a redirection of grants should receive serious attention;
- Pursue the appropriate national departments on the committee alternative suggestions with regards to combing appropriate provincial MECs or have a dedicated road institution.

Education recommendations:
The bureaucratic tape and poor financial management systems should be eliminated in order to fast track delivery. Procurement and distribution of learning support materials should be prioritised. A means of addressing these weaknesses is to introduce training programmes for especially those officials at middle-management level.

Housing:
An in principle policy decision has been taken that 0.5% - 07% of the provincial budget has to deal with emergencies such as disasters.

All applications should be captured in a database, which link all the provinces to avoid this double allocation. It is both the National and Provincial government working together to solve such problems as housing delivery is a priority for both National and Provincial departments.

The department has shifted from its policy of quantity to quality as envisaged by the fact that speeding up delivery compromises the quality of houses.

MEC's have to facilitate the problems related to bureaucracy such as delays in approving new housing programmes as a result of property rates.

The Minister has also recommended that women in housing are promoted and not marginalized.

Due to the increase in shelter demand, the upgrading of informal settlements should be prioritised so as to bring water and sanitation.

It has been agreed that provinces should indicate problems they experience so that the Minister can be aware of them such as in the case of the Minister of land affairs who is helping with the issue of R281 certificates to speed up the process.
- There should be a standard payment system in place to minimise fraud.
- Guidelines with regard to the special needs of certain categories of historically disadvantaged people such as women and the disabled, in the allocation of houses, should be a priority.
- Local government should comply with National norms and standards in housing and not raise standards which have caused the collapse of projects.
- Local government should avoid paying a lot of money to consultants.
- The devolution of responsibilities should be accompanied by reciprocal funding.

With regards to the cross-sectoral issues in the provinces, the following have to be investigated;

- A discussion document on both vertical (across sectors) and horizontal (across spheres) co-ordinations be produced;
- Investigate the progress in provinces towards finalisation of PPPs
- Appeal to provinces, national and provincial departments to display better utilisation of allocated financial resources instead of continuously demanding for additional assistance
- Investigate the possibility of instituting legislation with regard to excess bank charges for beneficiaries of social security grants;
- Explore what pressure still exists to expand personnel costs;
- Explore whether rural health facilities are adequately equipped for incoming medical personnel to carry out their functions
- Pursue the feasibility of national department undertaking the functions of child feeding scheme

Hospital Reconstruction and Rehabilitation.
- Maintenance funds should not be transferred to Public Works, but the department of Health.
- Maintenance of all health institutions should be the responsibility of the department of Health and not Public Works
- Now that provinces have developed the ability to spend and procurement takes six months, it is crucial that provinces have medium to long-term plans. However all of these plans need an indication from Treasury if province will be eligible for money.
Recruitment and Retention of Skilled personnel:
- Need to development a sense of patriotism coupled with incentives
Equity:
- Identify clear targets as in IGFR coupled with a sensible increase in conditional grants.
- Low per capita spending should be redressed with the new census figures so that provinces that have received low allocations can have their budgets increased based on more realistic population figures.

Local Government:
- The role and responsibilities of local government needs to be clearly defined to facilitate Integrated Development Planning

HIV/AIDS Conditional Grant:
- Should be immediately implemented in all provinces

District Health Services and Municipal Health Services:
- The process of District Health Services should be accelerated.
- Municipal Health Services should be defined quickly in consultation with municipalities and their related associations.

The Select Committee on Finance together with other relevant Select Committee should undertake a visit to provinces to investigate the following:
- Upkeep of State owned properties
- Conditions of classrooms
- Availability of water and sanitation facilities
- And any other matters relating to infrastructure provisions

C) Conclusion
We would like to thank the National Treasury on the release of the third the Intergovernmental Fiscal Review 2001. It has helped members to look at the social services sector critically and has observed that committees need to play an active role in their oversight work over these issues. We hope that the next IGFR will be released on time so that more discussions could take place and cover other sectors like agriculture, environment and tourism etc.

The 2001 review offers a good start, and is a fertile ground for comprehensive and robust analysis since this non-financial approach to assessment of programme is in its infancy. Further adjustments can be expected in future Reviews.

This report will form part of the discussion documents during the MTBPS hearings due to be conducted by the budget committee.

This was the first of its kind and there is room for improvement.

We would like to thank all the participants for their contributions in particular the Ministers, MECs and provincial standing committees. We thank all the researchers, committee section and government officials for their sterling work in preparing for the hearings and this report.