ATC151125: Report of the Select Committee on Appropriations on the Proposed Division of Revenue and Conditional Grant Allocations to Provincial and Local Spheres of Government as Contained in the 2015 Medium Term Budget Policy Statement, dated 25 November 2015

NCOP Appropriations

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE PROPOSED DIVISION OF REVENUE AND CONDITIONAL GRANT ALLOCATIONS TO PROVINCIAL AND LOCAL SPHERES OF GOVERNMENT AS CONTAINED IN THE 2015 MEDIUM TERM BUDGET POLICY STATEMENT, DATED 25 NOVEMBER 2015 

 

In compliance with Section 6(10) of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009, the Select Committee on Appropriations, having considered the 2015 Medium Term Budget Policy Statement and having heard comments from stakeholders, reports as follows:

1.         Introduction

The Minister of Finance (the Minister) tabled the Medium Term Budget Policy Statement (MTBPS) on 21 October 2015, outlining the budget priorities of government for the medium term estimates. In terms of the Money Bills Amendment Procedure and Related Matters Act No 9 of 2009 (herein referred to as “the Act”), committees on appropriations are required to consider and report on the proposed division of revenue and conditional grant allocations to provincial and local government as contained in the MTBPS. The report of the Select Committee on Appropriations as per Section 6(10) of the Act must contain the following; as referred to it in terms of Section 6(8):

• The spending priorities of national government for the next three years;
• The proposed division of revenue between the different spheres of government and between arms of government within a sphere for the next three years; and
• The proposed substantial adjustments to conditional grants to provinces and local government, if any.

 

1. Medium term spending trends and priorities

 

Spending priorities over the medium term focus on education and skills development, health, social protection, social and economic infrastructure and support for job creation. For this reason, government is expected to spend, over the next three years, R3.762 trillion. Government spending is set to grow at 7.2 per cent over the medium term. The proposed allocations are guided by the 2014-2019 Medium Term Strategic Framework and its 14 outcomes. Basic education, health and social protection receive over 43 per cent of allocations, reflecting government’s continued prioritisation of funding for the social sector.

 

About R165 billion is allocated for community infrastructure over the Medium Term Expenditure Framework (MTEF) period and budgets for integrated human settlements continue to grow strongly. Government proposes to allocate R313 billion to capital spending, and transfer another R228.9 billion to municipalities for infrastructure projects. 

 

Over the MTEF, nearly R13 billion will be added to the social assistance budget to accommodate the increase in beneficiaries who moved from 2.5 million in 1998 to 16.7 million currently. This figure is projected to reach 18.1 million in the 2018/19 financial year. According to government, the rising electricity prices and population growth have put pressure on the ability of municipalities to fund free basic services for low-income households. In this regard, government proposes to add R6 billion over the MTEF to the local government equitable share to offset these trends.

 

A sum of R37 billion has been allocated to public employment programmes, through the Expanded Public Works Programme, to create about 6 million short-term jobs. Government further reported that by 2017, a Community Work Programme is expected to be present in every municipality. Over the MTEF, a direct funding of R16.2 billion will support industrialisation through incentives, promotion of various industries, and assistance to small enterprises and cooperatives. Government will also abandon revenue of about R24 billion each year to provide tax incentives to businesses.   

 

1. The proposed division of revenue

Division of Revenue	2015 MTBPS			Real Annual Average Growth Rate (2016/17-2018/19) %
	2016/17 R billion	2017/18 R billion	2018/19 R billion
National allocations	557.6	596.7	642.0	1.2%
Provincial allocations	503.4	548.8	591.1	2.3%
Equitable share	412.2	447.6	482.5	2.1%
Conditional grants	91.2	101.2	108.6	3.1%
Local government allocations	106.9	115.3	128.4	3.5%
Equitable share	52.9	57.5	62.7
Conditional grants	42.8	46.0	53.2
General fuel levy	11.2	11.8	12.5
Total allocations	1 168.0	1 260.8	1 361.5	1.9%

 

The above table shows that over the 2016 MTEF period, the division of revenue amongst the three spheres will generally be characterised by marginal increases with a total real average growth of 1.9 per cent being projected. The main driver of this growth will be allocations to the local government sphere (projected to grow by an annual average of 3.5 per cent) and to a lesser extent, provincial allocations which are set to grow by 2.3 per cent per annum. Moreover, the allocations in the form of conditional grants drive the growth in provincial allocations over the medium term.   

 

Over the next three years, provinces will be allocated R1.643 trillion. Of this amount, R1.342 trillion will take the form of the provincial equitable share and R301 billion will be conditional grants transferred by national departments. The proposed division of revenue and conditional grant allocations are made during the need for sustainable public spending due to the current weaker economic environment and poor economic outlook. Government remains committed to moderate expenditure growth within the ceiling announced in the 2015 Budget, whilst supporting National Development Plan (NDP) priorities as expressed through the Medium Term Strategic Framework.

 

The most pressing funding challenge provinces face over the MTEF period is covering higher compensation costs stemming from the public sector wage settlement. An amount of R29.9 billion will be added to the provincial equitable share for the current and the next two financial years to fund the shortfall. Government reported that the balance will be covered through savings and reallocation of surpluses. The additional funds will be allocated using the equitable share formula, the largest components of which measure demand for services in education and health. The National Treasury and the provinces will review this formula over the medium term to ensure it fairly takes into account spending pressures across provinces.   

 

1. The proposed reforms of provincial conditional grant funding

Changes that will be introduced to provincial conditional grants over the period ahead include merging the School Infrastructure Backlogs Grant with the Education Infrastructure Grant from 2017/18. Funds will be added to the Provincial Roads Maintenance Grant to allow for the collection of data to measure performance in maintaining roads and to create an incentive component to reward good performance in managing provincial roads infrastructure. Funds will also be added to the Public Transport Operations Grant over the MTEF period to compensate for the rising costs of subsidised bus services. Provinces are also expected to contribute from their own budgets towards the costs of providing public transport.

 

Furthermore, the scope of the Comprehensive HIV and AIDS Grant will be expanded to also cover the treatment of tuberculosis (TB). The name of the grant will change to the Comprehensive HIV, AIDS and TB Grant to reflect this, and funds will be added to it in the 2017/18 and 2018/19 financial years to support expanded treatment of these diseases. The human papillomavirus component of the indirect National Health Grant was scheduled to end in 2015/16 but will now be extended over the MTEF period. It will remain an indirect grant for the first two years of the period before becoming a direct grant from 2018/19.

 

Funds are added to provincial allocations in the two outer years of the MTEF period for the expansion of early childhood development services, including for the maintenance of facilities. Other funds will be added to the Substance Abuse Treatment Grant to complete the building of new treatment centres in four provinces. Funds will also be allocated in the 2017/18 and 2018/19 financial years to fund the operations of these centres.

 

To assist the Department of Agriculture, Forestry and Fisheries with capacitation to improve the monitoring of grants and the performance of the sector, a small amount will be reprioritised out of the Comprehensive Agriculture Support Programme. Funds are also reprioritised out of the Human Settlements Development Grant in the 2016/17 financial year, mainly to fund the extension of the bucket eradication programme.

 

1. The proposed reforms of local government conditional grant funding

Government has completed the second phase of its local government infrastructure grant review. The changes to local government infrastructure grants emanate from a review process that the National Treasury led in collaboration with the Department of Cooperative Governance, the Department of Planning, Monitoring and Evaluation, the South African Local Government Association, and the Financial and Fiscal Commission. The reforms will be introduced over the MTEF period to streamline these grants and improve the value and sustainability of associated investments. Proposed reforms to be introduced from next year include -

• Reforming the Public Transport Network Grant to support financially sustainable transit networks in large cities.
• Three overlapping water and sanitation grants will be merged in 2016/17. The Municipal Water Infrastructure Grant, the Water Services Operating Subsidy Grant and the Rural Households Infrastructure Grant will be merged into a single grant that will be targeted at reticulation and on-site solutions in low-capacity municipalities. Over the MTEF period, some regional bulk infrastructure grant allocations will also be converted to direct transfers to municipalities to allow them to implement their own bulk water and sanitation projects. More emphasis will also be placed on ensuring that, where possible, municipalities raise financing to co-fund bulk projects that serve paying customers.
• Data on the extent and condition of roads has been collected over several years using the Rural Roads Asset Management Systems Grant. The data will begin to guide the selection of municipal roads projects. Conditions in the Municipal Infrastructure Grant will require this and will also be changed to allow funds to be used for road maintenance and refurbishment if project selection is based on this data. Generalised ring-fencing in the Municipal Infrastructure Grant will be changed to conditions that require that municipalities respond to identified gaps in sports infrastructure. Municipalities will also be encouraged to increase their investment in other community infrastructure, including cemeteries, community centres, taxi ranks and market places.
• The indirect Bucket Eradication Programme Grant was due to end in 2015/16 but will be extended to the 2016/17 financial year to complete the eradication of bucket sanitation systems in formal residential areas. Sanitation upgrading and bucket system eradication in informal areas will continue to be funded through the Urban Settlements Development Grant, the Human Settlements Development Grant and the Municipal Infrastructure Grant as part of the roll-out of basic services and informal settlement upgrading.
• The Municipal Demarcation Board has approved a number of significant boundary changes in an attempt to improve the viability of municipalities. These changes involve merging or splitting existing municipalities, and will result in substantial administrative costs during the transition. To support the implementation of the changes, the Municipal Demarcation Grant will receive increased allocations in the 2016/17 and 2017/18 financial years.
• Government is committed to making changes to achieve the NDP goal of building a capable state at all three levels of government. To support more strategic capacity building interventions in municipalities, the Municipal Systems Improvement Grant will become an indirect grant. The initiatives funded from this grant will be aligned to the Back-to-Basics Strategy. The Department of Cooperative Governance and the National Treasury will agree to the details of how the programme will work.
• The Municipal Human Settlements Capacity Grant was introduced in 2014/15 to facilitate the development of capacity to manage human settlements programmes in anticipation of the assignment of the housing function to cities. However, there is no longer a need for this stand alone grant as the assignment process was subsequently suspended indefinitely. The grant will be terminated in 2016/17. In place of a separate grant, cities will be allowed to use up to 3 per cent of the Urban Settlements Development Grant to improve their capacity with regard to built-environment functions.  
• To finance government priorities, funds will be reprioritised out of the Municipal Infrastructure Grant and the Municipal Systems Improvement Grant.  
• Grants are introduced that differentiate between metros, secondary cities and rural areas. Secondary cities in particular will see changes to their planning requirements.

 

1. Funding of Higher Education submissions: Challenges, implications and prospects

6.1 Department of Higher Education and Training

The Department of Higher Education and Training (DHET) submitted that the White Paper for Post-School Education and Training sets a target of 1.6 million students in universities, 2.5 million in Training and Vocational Education and Training (TVET), and 1 million in Community Education and Training Colleges (CET) by 2030. The number of Grade 12 learners estimated to enrol in universities will increase from 172 000 in 2013 to about 250 000 by 2019. This will put pressure on universities to expand. Currently, the higher education system caters for approximately 1 million university students, 720 000 TVET college students and 330 000 CET college students. The DHET added that the National Development Plan (NDP) set a target of 1 620 000 students enrolled in higher education per annum by 2030; that all qualifying National Student Financial Aid Scheme (NSFAS) students should receive the full cost of a study loan (the poor working class who meet the threshold); and that students who do not qualify should have access to bank loans, backed by state sureties.  

The DHET submitted that the university funding for 2016 will be affected by the no fee increase in 2016 and the outstanding NSFAS shortfall for the 2013, 2014 and 2015 academic years. The DHET further indicated that there was underfunding of NSFAS and the university sector in general. The DHET said the shortfall, based on actual figures from universities, due to no fee increase for the 2016 academic year will be R2.330 billion (R1.915 billion for tuition fees and R415 million for residence fees). The DHET clarified that government and the universities agreed to share the shortfall. Universities will contribute R394.7 million and government will contribute the remaining R1.935 billion.

 

The DHET further submitted that the National Development Plan provides ambitious targets for the higher education sector despite the underfunding of NSFAS. Despite significant increases in NSFAS allocations from government from R1.7 billion in the 2009 academic year to R6.6 billion in the 2016 academic year, available appropriated funds are insufficient to support all qualifying students at full cost of study. If the NDP targets are to be met, significant additional funding will be required.   

6.2 Council on Higher Education

The Council for Higher Education (CHE) submitted that all efforts by stakeholders to address the issues of student fees and the imperative of minimising the burden on poor students and universities were welcome. The CHE indicated that the no fee increase for 2016 will have ongoing implications. The CHE added that while the immediate pressure can be relieved, it does not solve the longer term challenges of funding the poor. The CHE explained that the main reason for increases is not necessarily tuition fees, but other costs like student support services, accommodation, meals and books.  

The CHE proposed the following to increase productivity and efficiency:

• Attention should be given to NSFAS loan and debt recovery rates;
• Universities should self-examine and cut costs related to functions, catering, travelling and align its expenses with National Treasury prescripts;
• Re-examine SETA funds. The surplus portion can be earmarked to meet the shortfall;
• Universities should share infrastructure, services and resources where practical to manage costs (technological innovations);
• Universities should ensure effective utilisation of available infrastructure;
• Universities should improve internal efficiency; and
• Effective planning and management by universities.

The CHE concluded by submitting that prudent financial management linked to appropriate planning capacity must be implemented by universities. Austerities at universities should be similar to those applied by National Treasury. The CHE further recommended that universities should reprioritise their budgetary allocations without sacrificing core business imperatives and there should be partnerships and increased collaboration between stakeholders.

 

1.  Observations

While considering and deliberating on the 2015 MTBPS and submissions by stakeholders, the Select Committee on Appropriations observed the following: 

1. Medium term expenditure priorities

7.1.1     Medium term spending priorities remain focused on education and skills development, health, social protection, social and economic infrastructure, and support for job creation. Further, despite the application of an expenditure ceiling to stabilise debt, government spending is projected to grow at 7.2 per cent over the medium term.

1. Public expenditure challenges

7.2.1     The contingency reserve will be drawn down by R5 billion in the 2015/16, R10 billion in the 2016/17 and R26 billion in the 2017/18 financial years.

7.2.2     The recent public sector wage agreement led to a compensation budget shortfall of R12.2 billion in the 2015/16, R20.6 billion in the 2016/17 and R31.1 billion in the 2017/18 financial years.

7.2.3     Over the past three years local government spending increased from 77 per cent in 2012/13, 86 per cent in 2013/14 and is now at 91 per cent for the 2014/15 finacial year.

1.  Proposed division of revenue

7.3.1     Over the MTEF national departments are allocated 47.4 per cent of available funds, provinces are allocated 43.4 per cent and local government is allocated 9.2 per cent.

7.3.2     The most pressing needs for provinces over the MTEF is covering higher compensation costs.

7.3.3     The most pressing needs for municipalities over the MTEF is sustaining the provision of free basic services with the rising electricity costs and population growth.

1.  Proposed reforms to provincial conditional grants

7.4.1     The proposed reforms include grants that will enable the use of funds for the renewal, refurbishment and rehabilitation of existing infrastructure, alongside asset management systems to plan and prioritise maintenance.

1. Proposed reforms to local government conditional grants

7.5.1     The Public Transport Network Grant is reformed to support financially sustainable transit networks in large cities.

7.5.2     Urban grants are consolidated over the MTEF period to tackle challenges in the built environment.

7.5.3     Grants are rationalised to reduce complexity and administrative burdens. Several water and sanitation grants are being merged.

7.5.4     Grants are introduced that differentiate between metros, secondary cities and rural areas.

 

1. Recommendations

After considering and deliberating on the 2015 Medium Term Budget Policy Statement and submissions by stakeholders, the Select Committee on Appropriations recommends as follows:

1.   Medium term expenditure priorities

8.1.1     In addressing the need for additional funding for higher education, government should take a holistic approach that will also address all relevant issues within the sector such as shortfalls in subsidies to universities, NSFAS, further education and training colleges and operational costs for the Department of Higher Education and Training.

1.  Public expenditure challenges

8.2.1     National Treasury should strengthen its monitoring and support mechanisms to ensure that sector departments in various spheres as well as municipalities are able to spend the allocated funds effectively to avoid under-spending that might lead to unnecessary roll-overs and reprioritisation of funds.

1.  Proposed division of revenue

8.3.1     The National Treasury should, on a regular basis, review its application of the equitable share of revenue formula in order to address challenges such as shortfalls in provinces to cover employee compensation costs and the pressing needs for municipalities to sustain the provision of free basic services with the current rising electricity costs, water shortages and population growth.

1. Having considered the 2015 Medium Term Budget Policy Statement and submissions made by stakeholders, the Committee reports that it has agreed to the proposed division of revenue and conditional grant allocations to provincial and local government, as contained in the 2015 Medium Term Budget Policy Statement.

 

Report to be considered.